CHINA Law and Practice Contributed by: Catherine Chen and Shaun Gao, Zhong Lun Law Firm
commitments, including detailed examination of security interests and governmental registra - tions. Intellectual Property Intellectual property (IP) verification focuses on ownership confirmation, registration status and licensing agreements, while implementing com - prehensive risk mitigation strategies. Dispute Management Litigation assessment examines pending dis - putes, historical proceedings and compliance with judicial decisions. ESG and Local Context Considerations Environmental compliance, labour practices and governance mechanisms undergo systematic evaluation. The process incorporates unique Chinese market characteristics, including guanxi networks and dynamic regulatory environments, while maintaining rigorous verification standards. 3.2 Process Investment Round Timeline and Collaboration Framework Due diligence timeline structure Early-stage venture capital rounds typically con - clude within two to four weeks, reflecting simpler corporate structures and streamlined diligence requirements. Late-stage private equity rounds extend to four to six weeks, accommodating more complex corporate arrangements and comprehensive stakeholder considerations. Collaborative legal framework Investors generally engage shared counsel for comprehensive due diligence, with costs typi - cally reimbursed by the company. This collec - tive approach enhances efficiency while reduc - ing redundant investigations. Each investor may retain separate counsel for term negotiations,
enabling protection of specific interests within the collaborative framework. Stakeholder dynamics The process balances existing investor insights with new investor perspectives, creating a dynamic ecosystem that preserves historical context while incorporating fresh strategic input. This structure maintains efficient collective pro - gress while protecting every single investor’s interests throughout the financing round. This balanced approach optimises the invest - ment process through structured collaboration while preserving individual stakeholder protec - tions. 3.3 Investment Structure Preferred Equity Structures in Chinese Venture Capital Contractual framework Given the absence of formal “preferred share” classification under PRC law, investors uti - lise contractually engineered equity interests to establish preferential rights. This innovative approach mirrors common law preferred share characteristics while accommodating Chinese
regulatory requirements. Key preferential rights These include:
• dividend preference; • liquidation preference; • redemption rights; • anti-dilution adjustments; • pre-emptive rights; • right of first refusal (ROFR); • co-sale rights; • drag-along rights; and • protective provisions (veto rights).
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