The Trueblood Case Studies
Commitment to Share
BuyCo is a privately held technology developer and manufacturer in the
transportation industry. On October 31, 20X1, BuyCo entered into an
agreement with SellCo to purchase certain assets and assume certain
liabilities of Sell Co (the “Transaction”). BuyCo intends to incorporate the
processes, economic resources, and technology acquired in the Transaction
into its existing business to serve the transportation industry with energy
-efficient solutions and provide a return to its shareholders. The assets and
liabilities acquired meet the definition of a business as defined in ASC 805-
10, Business Combinations: Overall.
Pursuant to the agreement, BuyCo will transfer to the owners of SellCo cash
of $2 million and 10 million shares of BuyCo common stock. BuyCo will
also assume liabilities of $4.5 million.
The terms of the agreement define the “liquidity event period” as the period
beginning at the closing of the Transaction and ending on December 31,
20X2. If BuyCo undergoes an IPO during the liquidity event period, and the
10 million shares received by SellCo in the Transaction have a fair value of
less than $20 million, BuyCo would be required to issue up to 2 million
additional shares of common stock such that the total fair value of shares
held by SellCo equals $20 million (the “Share Value Commitment
”). BuyCo would have sufficient authorized and unissued shares to settle the
Share Value Commitment, and BuyCo would be permitted to settle in
unregistered shares. The agreement requires the Share Value Commitment to
be settled in shares and under no conditions will BuyCo be required to settle
the Share Value Commitment in cash. BuyCo has concluded that it is
more likely than not that the number of shares required to settle the Share
Value Commitment will be less than 2 million.
The Transaction closed on December 31, 20X1, at which time BuyCo legally
obtained control over the purchased assets and assumed liabilities of SellCo.
The fair value of BuyCo common stock was $1.85 per share on October 31,
20X1, $1.95 per share on December 31, 20X1, and $1.90 per share on June
30, 20X2. BuyCo hired Entity E, a third-party valuation specialist, to
determine the fair value of the Share Value Commitment. On the basis of the
current fair value of BuyCo common stock, the guaranteed value of $20
million, the probability of an IPO occurring during the liquidity event period,
and other relevant valuation assumptions, Entity E estimated the fair value of
the Share Value Commitment to be $1.4 million, $450,000, and $1.2 million
on October 31, 20X1, December 31, 20X1, and June 30, 20X2, respectively.