Occasionally in acquisitions, the Buyer may offer its stock (and cash) as consideration in exchange for the stock or assets of the Target. So essentially, the Target is in effect investing in the Buyer’s business by taking the Buyer’s stock for payment.
Where this becomes an issue is when the Buyer is a private company that uses its stock as consideration. Many times the Buyer will circulate a draft of the Stock/Asset Purchase Agreement requiring the Target to make extensive representations and warranties, yet making very minimal representations itself. This is a common Buyer trick that Targets should be aware of.
Therefore, if the Buyer is issuing stock to the Target’s shareholders as consideration for the acquisition, it is reasonable to request that the representations and warranties of the Buyer be as extensive, or nearly as extensive, as the Target’s. However, if the Buyer is a public company using its stock as consideration, these representations and warranties are typically reduced because this material information is required to be disclosed to the Securities and Exchange Commission (SEC) and is publicly available for review and incorporated into the Stock/Asset Purchase Agreement by reference.