Description

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.