- Learn Basic Accounting in Less than 1 Hour!
- Accounting Basics
- What are Accounting Principles
- Accounting Cycle
- Accrual Accounting Basis
- Cash Basis Accounting
- Matching Principle of Accounting
- Conservatism Principle of Accounting
- Cash Accounting
- What are Accounting Policies?
- Accounting Estimates
- Mark to Market Accounting
- Cash Accounting vs Accrual Accounting
- Operating Cycle
- Fiscal Year
- Fiscal Year vs Calendar Year | Top Differences | Examples |
- Financial Reporting
- Consolidated Financial Statement
- Audited Financial Statements
- Accounting Scandals
- IFRS vs US GAAP
- IFRS vs Indian GAAP
- Debit vs Credit in Accounting
- Double Entry Accounting System
- Journal in Accounting
- Ledger in Accounting
- Journal vs Ledger
- What is Trial Balance ? | Examples | Steps | Prepare | Errors
- Reconciliation of Books | Types, Best Practices | Useful Tips
- Petty Cash | Meaning | Template | Accounting | Example
- Debit Note | Debit Notes Accounting & its Top Characteristics
- Credit Note
- Debit Note vs Credit Note | Top 7 Differences (Infographics)
- Balance Sheet
- Balance Sheet
- Accounting Equation
- Assets vs Liabilities | Top 9 Differences (with Infographics)
- Trial Balance vs Balance Sheet | Top 10 Differences You Must Know!
- Balance Sheet vs Consolidated Balance Sheet
- Bank vs Company Balance Sheet
- Commitments and Contingencies
- Management Discussion & Analysis
- Revenue Reserve vs Capital Reserve | Top 7 Differences
- Revenue Reserve
- Capital Reserve
- Capital Receipts vs Revenue Receipts | Top 8 Differences
- Capital Lease vs Operating Lease | Top Differences You Must Know!
- Debt vs Equity Financing | Advantages | Disadvantages | Example
- Internal vs External Financing | Top 7 Differences (Infographics)
- Available for Sale for securities
- Held to Maturity to securities
- Cash and Cash Equivalents | Examples, List & Top Differences
- Cash Equivalents
- Restricted Cash
- 3 Types of Inventory | Raw Material | WIP | Finished Goods
- Current Assets
- FIFO vs LIFO
- First In First Out (FIFO)
- Last in First Out (LIFO)
- Non-Current Assets
- Accounts Receivables? | Definition, Accounting Examples
- Accounts Receivables Factoring
- Allowance for Doubtful Accounts
- Accrued Revenue
- Liquid Assets
- Marketable Securities on the Balance Sheet | Top Examples
- Prepaid Expenses
- Tangible vs Intangible Assets
- Net Tangible Assets | Calculate Net Tangible Assets Per Share
- Tangible Assets
- Salvage Value
- Residual Value
- Fixed Capital vs Working Capital | Top 8 Differences (Infographics)
- Impariment of Assets
- Negative Goodwill
- Accounts Payable | Days Payable Outstanding | Formula |
- Current Liabilities | List of Current Liabilities on Balance Sheet
- Accrued Liabilities
- Notes Payable
- Revolving Credit Facilities
- Bonds Payable Accounting
- Bad Debt Reserve Allowance
- Deferred Expenses
- Unearned Revenue (Sales)
- Deferred Revenue (Income)
- Current Portion of Long-Term Debt (CPLTD) | Balance Sheet
- Long-Term Debt in Balance Sheet
- Financial Liabilities | Definition, Types, Ratios, Examples
- Long-Term Liabilities
- Accounts Receivable vs Accounts Payable
- Minority Interest
- Accounting for Convertibles
- Accounting for Derivatives
- Financial Lease vs Operating Lease
- Off balance Sheet Financing
- Finance vs Lease
- Shareholders Equity
- Shareholders Equity Statement
- Negative Shareholders Equity
- Par Value of Stock
- Share Capital
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Owners Equity
- Preferred Shares
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Stock Dividend
- Cash Dividend
- Preferred Dividends
- Ex dividend date
- Date of Record of dividends
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Income Statement
- Income Statement | Top Examples | Template | Format | Analysis
- Cost of Goods Sold
- Direct Costs
- Indirect Costs
- Non Recurring Items
- EBIT vs EBITDA | Top Differences | Examples | Calculation
- Depreciation – Formula | Types | Most Comprehensive Guide
- EBITDA vs Operating Income
- Straight Line Depreciation Method
- Amortization of Intangible Assets
- Unrealized Gains (Losses)
- Non Cash Expense
- Share based compensation
- Restructuring Cost
- Extraordinary Items
- Double Taxation
- Net Operating Loss (NOL)
- Tax Shield
- Sundry Expenses
- Interest vs Dividend | Top 9 Differences (with Infographics)
- EBITDA vs Net Income
- EBIT vs Net Income
- EBIT vs Operating Income
- Accounting Profit vs Economic Profit
- Income Tax vs Payroll Tax
- Tax credits vs Tax deductions
- Gross Income vs Net Income
- Profit vs Revenue
- Revenue vs Earnings
- Revenue vs Income
- Profit vs Income
- Revenue vs Sales
- Capitalization vs Expensing
- Income Statement vs Balance Sheet | Top 5 Differences You Must Know!
- Statement of Comprehensive Income | Items | Colgate Example
- FOB Destination
- Explicit Cost
- Implicit Cost
- Direct cost vs Indirect Cost
- Nopat vs Net Income
- Marginal Costing vs Absorption Costing
- Cash Flow Statement
- Cash flow from Operations | Formula, Calculations & Examples
- Cash Flow from Investing Activities (Formula & Top Examples)
- Cash Flow From Financing Activities | Formula & Calculations
- Cash Flow Analysis
- Fund Flow Statement
- Direct vs Indirect Cash Flow Methods
- Cash flow vs Net Income | Key Differences & Top Examples
- Cash Flow vs Fund Flow | Top 8 Differences (with Infographics)
- Accounting Careers
- Accounting Interview Questions
- Financial Accounting Careers
- Top Accounting Firms
- Big Four Accounting Firms
- Forensic Accounting
- Cost Accounting
- Financial Accounting
- Accounting vs Engineering
- Finance vs Accounting
- Bookkeeping vs Accounting
- Accounting vs Auditing
- Bookkeepers vs Accountants
- Accounting vs Financial Management
- Cost Accounting vs Financial Accounting
- Cost Accounting vs Management Accounting
- Financial Accounting vs Management Accounting
- Accounting Firms in Australia
- Accounting Firms in Canada
- Top Accounting Firms in US
- Accounting Books
Contingent Shares – In layman’s term contingent shares are shares which are issued in contingent times.
Let’s look at the proposed merger details of Harmony Merger Corp with NextDecade LLC. One of the merger details is that Harmony will issue to NextDecade shareholders approximately 97.87 million shares of Harmony common stock at closing, with up to 19.57 million additional contingent shares issued to NextDecade upon achievement of certain milestones.
In this article, we learn about what are contingent shares, its implications, how to issue it, and how relevant it is in business affairs.
- What are Contingent Shares?
- Contingent Shares Example
- Effect of Issuance of Contingent Shares
- Contingent Shares Issuance Agreement
- The impact of contingent shares on EPS (diluted EPS)
- In the final analysis
What are Contingent Shares?
As the name suggests, contingent shares are of different nature. They’re common shares that are issued under certain circumstances or we can say when certain conditions are met. For example, if Company A acquires Company B, Company A will agree to issue contingent shares if Company B reaches a certain earning target.
But why this sort of settlement/agreement is required? Let us take the previous example to expand upon our explanation.
Company A decides to acquire Company B. As a result, Company A and Company comes into contingent issuance agreement. This contingent issuance agreement is the result of a negotiation between Company A and Company B.
While negotiating, both the parties find that their terms are not in unison. And no amount of further negotiation can settle the dissonance. At this stage, both of these parties decide to come under an “if-then” terms of how one party will treat another.
Now let’s come back to the Company A & Company B. Let’s say that they have signed a contingent issuance agreement. As per the agreement, if Company B earns a certain amount, Company A will benefit the shareholders of Company B by issuing a set number of common shares. These shares are called contingent shares.
also, have a look at Preferred Shares and Preference Dividends | Complete Guide
WallStreetMojo Free Accounting Course
You will Learn Basics of Accounting in Just 1 Hour, Guaranteed!
* Please provide your correct email id. Login details for this Free course will be emailed to you
Contingent Shares Example
Let’s take a practical example to illustrate contingent shares. This will help us understand how the whole thing is done.
Company A acquired Company B. During the negotiation, Company A agreed to issue 20,000 common shares to the shareholders of Company B, if Company B increased its earnings by 20% in the current fiscal year. The current earning of Company B is $200,000. And the current number of shares outstanding is 200,000.
As of now, the earning per share would be = (Earning/Common Shares) = ($200,000/200,000) = $1 per share.
Now, let’s say that Company B is able to hit the target of 20% increase in its earning this year. That means Company A will issue 20,000 common shares as contingent shares.
As a result, the new earnings would be = ($200,000*120%) = $240,000.
And, the number of shares issues would increase to = (200,000 + 20,000) = 220,000.
Therefore, the new EPS would be = ($240,000/220,000) = $1.09 share.
Effect of Issuance of Contingent Shares
As a result of issuing such shares, there is one major effect on the earnings per share (EPS) of the company.
When “if and then” terms work, acquiring company issues new shares for the shareholders of acquired company. As a result, now the number of shares of acquired company increases.
And to calculate the new earnings per share, we will use the new number of outstanding shares. As a result, we get a new EPS which is more than the previous EPS (that may be different on different occasions).
Contingent Shares Issuance Agreement
Do you remember that we talked about contingent shares issuance agreement while explaining the concept of contingent shares? Now, let’s understand this before we go on to the other related concepts.
Contingent shares issuance agreement would be signed in the case of merger and acquisition. In merger/acquisition, the acquirer company promises to issue new common shares for the acquired company if certain conditions are attained.
Contingent shares issuance agreement is based on two main factors –
- First, it’s the time period. In the agreement, the time is appropriately mentioned.
- Second, the main condition which needs to be attained is either an achievement of a certain earning level or the attainment of a specific market price level.
Both of these parties must agree to these two factors. And that will result in the additional issuance of shares if the condition/s is met.
Below is a contingent share issuance arrangement excerpt from RealResource Residential LLC. Here there two types of issuances –
- a $10,000 face value 12% Series A Senior Unsecured Promissory Note convertible into Common shares at $0.5 per share
- one detachable Common stock Purchase warrant to purchase 10,000 shares with an exercise price of $0.50 per share expiring December 9, 2020.
Now let us at an example, where the pre-defined conditions were not met and the contingent shares were not delivered.
Below is an excerpt from India Globalization Capital Inc. They completed the acquisition of 51% of outstanding share capital of Golden Gate Electronics in May 2014. The terms of the agreement also included 1,004,094 shares as contingent on the electronics business meeting annual thresholds for revenue and profit through the fiscal year ending March 31, 2017. In this case, the contingent issuable shares were not delivered because the acquired company was unable to meet the targets.
The impact of contingent shares on EPS (diluted EPS)
Now the question is when we should include contingent shares as outstanding in diluted EPS.
Diluted EPS Formula = (Net Income – Preference Dividend) / (Shares Outstanding + Dilutive Shares + Contingent Shares).
As from the formula above, contingent shares would be added to the number of outstanding shares which will be resulting into a diluted EPS.
Please note that Contingent issuable shares are used only when the conditions are met.
We take an example to illustrate this.
Let’s say that Company X went to merge with Company Y in the year 2015. The terms of the merger were set like this –
if Company Y’s market price of the common share exceeds $80 per share during the year 2015 or currently over $80 per share, then Company X will issue 50,000 additional shares for the shareholders of Company Y in the year 2016.
- It has been seen that the market price of Company Y has already exceeded the set $80 per share in the year 2014.
- In 2014, Company Y’s market price of common shares was $100 per share on an average.
- The net income is assumed to be $800,000, $700,000, & $900,000 for the year 2014, 2015, & 2016 respectively.
- And the average outstanding shares in 2014, 2015, & 2016 were 100,000, 150,000, & 125,000 respectively.
The question is in this situation how Diluted EPS would be calculated? And when the contingent shares would be added to the outstanding shares of Company X?
Let’s try to understand this situation from the beginning.
The term was that if Company Y exceeds $80 per share as the market price of the common share during the year 2015 or currently, then Company X will issue 50,000 additional shares in the year 2016.
But as Company Y has already exceeded the goal of $80 per share as the market price in the year 2014 and the market price of common shares of Company Y in the year 2014 was $100 per share. Should we include contingent shares in the year 2014?
Was the condition met in 2014? The answer is YES. We should include conditional issuable shares whenever the goal is met.
So, here’s what the EPS would be = (Net Income / Outstanding shares + Contingent Shares) = ($800,000 / 100,000 + 50,000) = $5.33 per share. It is diluted EPS for 2014.
In the final analysis
Know that contingent shares are not always issued. If two parties disagree on terms of mergers/acquisition, then only the contingent shares are issues (that is also if the set conditions are met like pre-determined market price or net income during a certain period).
Hope this has added value. Good luck!
Other articles you may like