Facts:

You are advising a European private equity firm ("Buyer") on a proposed acquisition of a Hong Kong-based electronics manufacturing company ("Target"). The Target is privately owned and operates in the consumer electronics sector and has a growing presence in Europe and Asia. The Buyer sees this transaction as an opportunity to expand its portfolio and strengthen its foothold in the Asian market.

As part of the due diligence process, the Target has disclosed an intellectual property (IP) portfolio that includes patented designs, trademarks, and proprietary manufacturing processes. However, the Target has also admitted that some of its IP was developed by independent contractors, and there are no clear agreements assigning ownership to the Target. Additionally, the Target has failed to register key trademarks in Europe, which is a significant market for its products.

During the review of the Target’s IT systems, it was discovered that several employees are using unlicensed or counterfeit software. This raises concerns about compliance with intellectual property laws and the potential liabilities associated with such practices. Furthermore, the Target has not implemented adequate data protection measures and has faced a security breach in the past year, exposing sensitive customer data. There is no evidence that this breach was reported to customers or regulatory authorities.

The Target has also faced numerous customer complaints, particularly in Europe, regarding defective products. However, the Target’s warranty policies and product liability insurance appear insufficient to cover potential claims. The lack of documentation on how these complaints were addressed raises concerns about the Target’s approach to customer satisfaction and the potential reputational risks for the Buyer.

Your role is to assess the provided information and identify any potential risks or red flags that could impact the Buyer’s decision to proceed with the acquisition.

Question:

Based on your review of the materials provided, identify the issues or concerns that may arise in this transaction. Explain why these issues could be significant and what steps you would take to address them.