Money Stuff: A Merger Closing Mystery

XOMA Royalty Corp. and Ligand Pharmaceuticals Inc. are biotechnology royalty aggregators: They finance biotechnology companies by buying the rights to future drug royalty and milestone payments. [1]  In April, Ligand agreed to acquire XOMA, and the merger closed on July 14.

The merger price was $39 per share in cash ($739 million total), plus a contingent value right related to some litigation. Last year, XOMA sued Janssen Biotech Inc., claiming that Janssen had used a XOMA-owned technology in developing a drug called Tremfya and owes XOMA royalties. [2] The result of that lawsuit is uncertain, and the merger agreement provided that pre-merger XOMA shareholders will get 75% of the proceeds from it, if any, whenever it is resolved. But they are no longer XOMA shareholders (they were cashed out on July 14), so there needs to be some mechanism to pay them. The contingent value right (or CVR) is a sort of certificate representing the litigation: When the merger closed, each XOMA share turned into $39 in cash plus one CVR, which is an entry on the books of Ligand representing a share of the potential litigation proceeds. The CVRs are non-transferable and not listed on any exchange. For tax purposes, XOMA values the litigation at $50 million, which works out to a CVR value of $1.84 per share, [3] but that is just a guess and there is reason to think that the market valued the CVR at more like $5.

I said that “when the merger closed” each XOMA share turned into $39 plus a CVR. That is normally how mergers work: When the merger closes, the target’s shares turn into the merger consideration. That’s what, for instance, the first page of XOMA’s merger proxy says:

Pursuant to the Merger Agreement, at the time the Merger becomes effective (the “Effective Time”), each share of common stock … will be automatically converted into the right to receive (i) $39.00 per Share in cash … plus (ii) one contingent value right (a “CVR”) representing a contractual right to receive contingent cash payments, if any, derived from the net proceeds of a pending litigation against Janssen Biotech, Inc. (the “Janssen Litigation”).

You could imagine doing something else. Perhaps XOMA could have paid out some of the merger consideration before the closing. Like:

1. XOMA could dividend out $1 of cash the day before the merger closes, and then Ligand could pay $38 of cash and the CVR when the merger closes; or
2. XOMA could dividend out the CVR the day before the merger closes, and then Ligand could pay $39 of cash when the merger closes.

Etc. Why would you do that? Mostly you wouldn’t. Everything is more or less contingent on the merger closing, so you want to pay everything out at the time of closing. But every so often there are weird cases where it could make sense to pay some of the value out before the merger is completed. There was Novo Nordisk A/S’s proposal to buy Metsera Inc., where Novo wanted Metsera to dividend out much of the merger consideration to shareholders before the deal closed, as a way to allocate antitrust risk. Or we talked last year about a biotech company called ESSA Pharma Inc., whose main drug trial failed. It had some cash left over, and also some fairly speculative intellectual property. It decided to return the cash to shareholders and sell the IP to, as it happens, XOMA, in exchange for a little bit more cash plus a CVR. ESSA paid out the cash to shareholders in August as a dividend, and the XOMA merger closed in October.

For the most part this is silly, though, and you just pay out all the merger consideration when the deal closes. But on June 12 — two days after filing the merger proxy that I quoted above — XOMA put out a press release announcing “that the record date for the distribution of contingent value rights (‘CVRs’) … has been set at 5:00 p.m., Eastern time, on July 13, 2026.” That is: The shareholders as of 5 p.m. on July 13 — the day before the merger closed — would get the CVR. 

That’s a weird thing to announce! The merger agreement said that XOMA shareholders would get the CVRs when the merger closed. Anyone holding the stock at the merger closing — which occurred on July 14 — would get $39 plus a CVR. No separate “distribution” of CVRs. But the June 12 announcement contradicted that: If you held shares as of July 13, you’d be entitled to get the “distribution” of CVRs, separate from the $39 merger consideration you’d get the next day.

That creates a gap. If you bought XOMA stock on or before Friday, July 10, you owned the stock on Monday, July 13: Stock trades settle “T+1,” one business day after the trade, so buying on Friday would get you the stock on Monday. If you bought the stock on July 13, though, you only owned the stock starting on July 14. That’s good enough to get the merger consideration, when the merger closed on July 14, [4] but it is not good enough to get the CVR distribution: To get that distribution, you needed to be a record holder as of July 13.

But the CVR was part of the merger consideration. Or so you would have thought, from reading the June 10 merger proxy. Or maybe it was not part of the merger consideration; maybe it was a separate distribution, as you would have thought from reading the June 12 press release. If it was not part of the merger consideration, then you could buy the stock on July 10, sell it on July 13, and keep the CVR: You’re still the record holder at 5 p.m. on July 13 (because your sale hasn’t settled yet), so you get the CVR and the buyer does not.

XOMA’s stock traded between about $43 and about $45.22 in the week of July 6 to 10, implying a value for the CVR between about $4 and $5.22, with volumes of a few hundred thousand shares a day. On July 13, the stock traded 6.7 million shares at an average price of about $40.40 per share, closing at $40.17, implying … what? If you bought stock that day, you’d definitely get $39 in cash the next day. If you paid $40.40 for the stock, I think you were buying something like:

• $39 in cash, plus
• a … 25%? … chance of getting a CVR worth about $5? [5]

The merger proxy said that if you bought stock on July 13, you’d get a CVR; the press release said that you wouldn’t. If you traded the stock on July 13, you were making a bet on which announcement was right. If you bought the stock, you were betting that you’d get the CVR; if you sold the stock, you were betting that you would get to keep the CVR.

Eventually the question was resolved. The buyers got the CVRs. On July 16 — two days after the merger closed — XOMA put out a somewhat shamefaced announcement (emphasis added):

As previously disclosed, on June 12, 2026, XOMA Royalty Corporation (“XOMA Royalty”) announced that the record date for the distribution of contingent value rights (the “CVRs”) had been set for July 13, 2026. Under the Agreement and Plan of Merger, dated April 27, 2026 (as amended, the “Merger Agreement”), the CVRs are issued by XOMA Royalty Holdings Corporation (“Holdings”) as a portion of the merger consideration payable in respect of shares of common stock issued and outstanding at the effective time of the merger (the “Merger”), consisting of: (i) $39.00 per share, and (ii) one CVR. XOMA Royalty’s common stock stopped trading as of 8:00 p.m. (Eastern Time) on July 13, 2026, and the Merger was consummated as of 8:15 a.m. (Eastern Time) on July 14, 2026, following the completion of a holding company reorganization pursuant to which Holdings became the parent of XOMA Royalty.

Holdings is providing notice that, consistent with the Merger Agreement and the CVR Agreement (as defined below), the July 13, 2026 record date will not be used to determine entitlement to the CVRs. … In accordance with the Merger Agreement and the CVR Agreement, Holdings is paying the merger consideration, including the CVRs, to holders of common stock as of the effective time of the Merger.

This strikes me as the correct outcome — it’s what the merger agreement said — but of course you’re not supposed to put out a press release saying the wrong thing! People who sold XOMA stock on July 13 for $41 thought that they would get to keep the CVR, because that’s what XOMA told them. It just also told them the opposite. 

The weirdest thing is that we have talked about all of this before, because ESSA Pharma did the same thing before it was acquired by XOMA. I mean, almost:

1. ESSA paid out its cash as a dividend to shareholders.
2. It announced, in two places in the same press release, that people who bought the stock on Aug. 25, 2025 (1) would and (2) would not get the dividend.
3. The stock traded at a high price on Aug. 22 (reflecting the dividend) and a low price on Aug. 26 (reflecting that buyers wouldn’t get the dividend).
4. But on Aug. 25, the stock traded at an in-between price, because some traders read the press release one way (“you get the dividend”) and others read it the other way (“you don’t”).
5. After the fact, ESSA shamefacedly resolved the ambiguity.

“Sometimes,” I wrote, “the press release is just wrong. I assume there will be lawsuits.” A law firm announced an investigation, but I guess there wasn’t enough in it for a lawsuit. Still you might think that XOMA, which bought ESSA, would have learned from this.

SpaceX’s stock closed on Friday at about $115. If you have $115, you can buy one share of SpaceX. If it goes up to $120, you’ll make $5; if it goes down to $110, you’ll lose $5.

If that is not spicy enough for you, you can ask your broker for margin loan. You put up your $115, you borrow another $115 from your broker, and you buy two shares of SpaceX. If it goes up to $120, you’ll make $10; if it goes down to $110, you’ll lose $10. 

If that is not spicy enough for you, you can go back to your broker and ask for a bigger loan, but your broker will say no. US margin rules will let you borrow up to 50% of the price of a stock — so you have to put up at least $115 of your own money to buy $230 worth of SpaceX — but not 67%, or for that matter 51% or 90% or 99%. The 50% number is simple and convenient, and it is the rule in the US, but it is not a law of nature, and at times it has been higher or lower. [6]

There are ways around this. If you are a hedge fund, and you want to make a big bet on SpaceX, what you might do is enter into a total return swap. You agree with a bank that, for every $1 that SpaceX stock goes up, the bank will pay you $1 million, and for every $1 that SpaceX stock goes down, you will pay the bank $1 million. That is economically equivalent to buying 1 million shares of SpaceX ($115 million worth): You get 1 million times the return on a share of stock. But you do not have to give the bank $115 million, or $57.5 million (50%), to enter into this trade. You have not bought any stock, and the bank is not lending you any money to buy stock. You are just doing an over-the-counter derivative. When you enter into the trade, its fair value is approximately $0: You don’t owe the bank anything until the stock goes down, and the bank doesn’t owe you anything until the stock goes up. 

The bank probably won’t let you do this trade with zero dollars down, though: If the stock goes down, you will owe the bank money, and the bank wants to be sure you’re good for it. The bank will do some due diligence on your hedge fund’s assets and strategy, to assess your credit risk, and it will ask for collateral: You will have to deposit some money — “margin” — to cover potential losses. That margin might be, I don’t know, $20 million or something [7] : Real money, but much less than the $57.5 million margin requirement to buy 1 million shares of actual stock. [8]

If you are not a hedge fund, can you get a similar deal? Last week, I would have said “no, banks do not do total return swaps with retail investors.” But good news! Bloomberg’s Bernard Goyder and Katherine Doherty report:

CME Group Inc. will launch single-stock futures Monday, allowing investors to hedge or speculate on more than 50 of the largest US companies. The contracts, offering leverage without the complexity of options, will be cash-settled on the closing price of the stocks they’re tied to.

The world’s largest derivatives exchange is betting the rise of retail trading and today’s market environment of hot IPOs with limited share availability will make the single-stock futures — a tool that failed to gain traction in the US after its first first launch 24 years ago — a success this time around.

“This has the ability to bring in a lot of new traders to our ecosystem,” Tim McCourt, global head of equities, FX and alternative products at CME, said in a phone interview. The exchange is targeting retail traders, having lined up more than 35 retail intermediaries to help get the futures in front of them, and institutional investors like asset managers, for whom it’ll be a new tool to manage risk, he said. …

One use case for futures will be to give investors long or short exposure to stocks where there is a shortage of inventory, as seen recently in SpaceX’s initial public offering. Investors who didn’t get allocated stock in a hot listing could potentially add exposure in a capital-efficient manner using futures. …

CME’s single-stock futures will be available to trade five days a week, 23 hours a day — longer than the normal 9:30 a.m. to 4 p.m. for equity markets. The quarterly contracts will come in two sizes: The larger ones — 55 of them will be introduced — will be based on 100 shares of stock, like typical options, while the 22 micro futures will be based on 10 shares. The latter ones will include Mag7 tech companies, along with 15 others such as Micron Technology Inc., Pfizer Inc. and Walmart Inc.

The single-stock futures are the economic equivalent of a total return swap, which is to say that they are the equivalent of owning (or shorting) 100 shares of the stock without paying for it up front.

The obvious question is: How much leverage can you get? And the answer is roughly 6x: “As required by CFTC and SEC regulations, initial and maintenance margin requirements for long or short outright Single Stock futures positions must be, at a minimum, 15% of the current market (notional) value of the futures contract,” says CME. (Individual brokers might have higher requirements.) So you could buy exposure to 100 shares of SpaceX — $11,500 worth — with just $1,725 of cash.

And then of course if SpaceX goes down to $97.75 you lose all your money, oops. That is the thing about stock market leverage: It magnifies gains and losses. We have talked about this recently? It keeps coming up? In the form “people are worried about stock market liquidity”? It is widely understood that, when people borrow a lot of money to buy stocks, that pushes stocks up but also makes markets more fragile: If the market goes down, people will have to sell stocks to repay loans, which will push stocks down more; a slight breeze could topple the whole thing. Now, stock market leverage has been increasing, in the forms of margin debt and hedge-fund leverage and leveraged exchange-traded funds, which makes many observers nervous. You could imagine regulators looking at that and saying “hmm, maybe we should dial it back a touch.” But, nope! Instead we have new ways for retail investors to buy more stock with less money down.

I suppose my greatest influence as a columnist is:

1. Modern securities class action lawyers have become increasingly creative and enthusiastic about suing US public companies for securities fraud whenever they do something bad. The rough idea is that the company probably did not disclose to shareholders that it was doing the bad thing, so shareholders were tricked into buying the stock; when the bad thing came out, the stock dropped and the shareholders lost money.
2. I frequently point out that this phenomenon is weird, and I gave it a name: “Everything is securities fraud.”
3. The name is sarcastic, though. My point is not that every bad thing that a public company does is actually securities fraud; my point is that (1) every bad thing that a public company does can result in a lawsuit for securities fraud and (2) that’s kind of bad.
4. Now, when judges reject some outlandish everything-is-securities-fraud lawsuit, they have a tendency to cite me, saying something like “Matt Levine says that everything is securities fraud but not so fast buddy.”

Is this the sort of impact on the US legal system that I dreamed of having as a young law student? Honestly yes it’s perfect. (Imagine if I was a lawyer!)

Anyway Abbott Laboratories is a US public company, it makes baby formula, it recalled some formula in 2022 over contamination concerns, the stock went down, blah blah blah, here’s a judicial opinion from Friday dismissing the lawsuit:

One could be forgiven for thinking that everything is securities fraud. Read frequently Matt Levine, Money Stuff, Bloomberg (2026). But it isn’t. The Supreme Court made that point decades ago.

“Congress, in enacting the securities laws, did not intend to provide a broad federal remedy for all fraud.” ... Instead, a section 10(b) claim requires a connection to the purchase or sale of securities. …

Plaintiffs allege a grab bag of deceptive conduct by Abbott. They point out that Abbott bungled the Sturgis plant in various ways, and neglected to run it properly. And they allege that Abbott concealed information from the FDA. 

Noticeably missing from the laundry list of deceptive acts is any connection to the purchase or sale of a security. The acts have nothing to do with providing misinformation to investors, or misleading the SEC, or manipulating financial data, or anything along those lines. …

Maybe Abbott didn’t manage the Sturgis plant as it should have. But mismanagement of a manufacturing plant is not securities fraud. Concealing information from the FDA is not securities fraud, either. Neglecting water leaks is bad, but it doesn’t violate the Exchange Act. 

The key points here are (1) not everything is securities fraud and (2) “read frequently Matt Levine” is now federal law.

I have joked a few times about prediction market indexes, but of course they exist now. Here’s a Risk article from July 17 about Belief Systems, which “has spent the past 10 months pulling order book data from Polymarket to assemble 13 event-based indexes that update every 30 minutes”:

The biggest opportunity, Stewart says, lies in markets where no effective proxies exist. He cites the firm’s global conflict risk escalation expectations index and peace expectations index, both launched in April. The conflict index includes 24 separate contracts covering questions such as whether the US will invade Iran before 2027, or strike a nuclear deal, or whether China will invade Taiwan or the US attack Cuba. 

“You can look at a single event contract, but that doesn’t tell the full story. You need the aggregate composition,” says Stewart. “We’re creating fundamental functional benchmarks, which can extend to politics, elections and interest rates.”

My joke was about a general prediction market index, where if the index goes up that would mean that events in general had become more likely. But of course in the real world what you want is conflict index or an AI index or whatever, where if the index goes up then that means that some specific category of event has become more likely. I guess that’s real, ish, and useful, ish.

Elsewhere, here is a website called ClearMarket, which attempts to give event contracts on Kalshi and Poymarket ratings based on their resolution rules. We have talked about this problem before: Event contracts generally pay $1 if an event happens and $0 if it doesn’t, but it is often not easy to tell if the event has happened. Some events have clear universally accepted definitive answers (most sports results), but many don’t. Did US ground troops enter Iran? Did Iranian missiles land in Israel? Did Ali Khamenei leave office? Did Cardi B perform at the Super Bowl? Did Strategy sell Bitcoin?

All of these questions resolved controversially, and ClearMarket’s thing is reading the resolution rules of the contract and giving them a grade from A (likely to resolve fine) to C (more likely to be a mess). It works in a backtest:

Across 7,166 Polymarket markets with public dispute records, contracts ClearMarket rated C (the lowest of its three Resolution Clarity Grades) were formally disputed at 20 times the rate of A- and B-rated contracts (1.59% vs 0.08%). 52 of the 55 disputes landed on C-rated contracts. The three challenges to A-rated contracts all failed: each market settled exactly as its rules specified.

If eventually institutional investors are actually trading on prediction markets in material size, they are going to have to think about and budget for and perhaps hold capital against resolution risk. Might as well get some third-party ratings.

Look, I’m sorry, but a reader named Matthew Wecksell emailed me (subject line: “Arbitrage”) to point out that:

1. New York City has a program to encourage drug users to turn in used syringes by paying 20 cents per syringe, and
2. You can buy a 120-pack of new syringes on Amazon for $19.99 (about 17 cents each).

It could make sense, for social-responsibility reasons, for New York to pay more for used syringes than you’d pay for new syringes at retail. But. We talked once about a Malaysian fryer oil arbitrage, which had roughly the same shape: Used palm oil was, for environmental-responsibility reasons, trading at a higher price than fresh palm oil, with predictable results. I’m sorry. Obviously don’t do anything with this information.

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