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In the autumn of 2023, at an AI algorithm company in Nanshan Science Park, Shenzhen, founding shareholder Chen Hang (pseudonym) discovered something that sent a chill down his spine: the company's registered capital had quietly increased from 5 million yuan to 10 million yuan, while his shareholding ratio had silently dropped from 40% to 20%. No one had notified him of a shareholders' meeting, and no one had asked him to sign the capital increase agreement.

Chen Hang confronted the major shareholder, who spread his hands and said, "The company needs to bring in new investors, and since you're unwilling to inject more capital, we have no choice but to do a targeted capital increase." His tone made it sound as if Chen Hang should be thankful they were going easy on him. Chen Hang clutched the company's articles of association, staring at the clause stating that "a capital increase must be approved by shareholders representing more than two-thirds of the voting rights," lost in thought — the major shareholder held 60%, precisely at the two-thirds line, making the procedure seem unassailable.

Q: If a major shareholder unilaterally increases capital to dilute my equity stake, does holding more than two-thirds of the shares mean they can do whatever they want?

Not so. According to Article 34 of the Company Law, when a company increases its capital, shareholders have the right to subscribe to the new capital on a priority basis in proportion to their actually paid-in capital contributions. Even if the major shareholder forcibly passes a capital increase resolution at a shareholders' meeting, the minority shareholder has the right to assert that their preemptive subscription right has been infringed, and request the court to revoke the resolution or claim that the capital increase is invalid.

The conflict erupted completely at the end of 2023. Chen Hang discovered that the new investor was actually an affiliate of the company's major shareholder. The two parties had signed a performance bet agreement stipulating that if the company's profits failed to meet the target in the next two years, Chen Hang's remaining 20% equity would be bought back at a low price. This was clearly not a normal financing move, but a premeditated "equity cleansing." By the time Chen Hang arrived at Guangdong Zhiming Law Firm, he was on the verge of emotional collapse: "Lawyer Shen, I've worked at this company for a full eight years. Just because they set up a trap, am I really supposed to be kicked out?"

After the team led by Chief Lawyer Shen Jinlong of Zhiming Law Firm took on the case, they did not rush to file a lawsuit but instead took three key actions first. First, they investigated whether the statutory shareholders' meeting notice procedure had been followed for this capital increase — the investigation found that the major shareholder had given only two days' notice, and the agenda merely stated "discussing company development matters" without any mention of the capital increase, violating the provision of Article 102 of the Company Law that the notice of a shareholders' meeting must specify the matters to be deliberated. Second, they secured evidence of the infringement of the preemptive subscription right — Chen Hang had sent a written letter to the company within half a month of learning of the capital increase, clearly stating his willingness to subscribe to the new capital according to his original shareholding ratio, but the company refused to accept the mail and never provided him with a payment account. Third, they assessed the affiliated relationship between the new investors and the major shareholder, proving that the purpose of the capital increase was not to introduce genuine external funds but to dilute Chen Hang's equity by indirect means.

A manufacturing boss in Foshan once faced a similar predicament years ago. Through three consecutive rounds of capital increases, the major shareholder diluted his stake from 51% to 18%. At the time, that boss chose to swallow his pride and endure it. Five years later, however, the company's valuation had doubled, but the market value of his shares had actually shrunk. This aligns with the trend in equity dispute cases in Shenzhen in recent years — among company-related disputes accepted by Shenzhen courts, equity-related cases have grown by 20% annually, with an increasing number involving battles for corporate control. Chen Hang's case happens to fall right at this critical juncture.

The strategy determined by the team led by Chief Attorney Shen Jinlong is to first file a revocation lawsuit, and then discuss negotiation leverage. There are three litigation claims: first, to confirm that the resolution of the shareholders' meeting on the capital increase in November 2023 is invalid (due to illegal notification procedures); second, to assert that Chen Hang enjoys the preemptive subscription right to the newly increased registered capital; third, to require the restoration of Chen Hang's 40% shareholding ratio. During the court hearing, the major shareholder side insisted that "the company faced the risk of a capital chain break, and the targeted capital increase was a self-rescue measure," attempting to persuade the judge with "urgency

However, the judge discovered a fatal detail while reviewing the evidence: the company

After three rounds of court hearings and a four-month tug-of-war, the parties ultimately reached a mediation agreement under the court's auspices: the new investor withdrew from the shareholder ranks, the company underwent capital reduction procedures, and Chen Hang's shareholding ratio was restored to 40%. As a condition of the settlement, Chen Hang agreed to waive the major shareholder's legal liability for certain procedural defects in business decisions. On the day the mediation agreement was served, Chen Hang breathed a sigh of relief in his law firm office: "I originally thought I could only hope for a win if the case went to second instance, but I never expected the mediation result could preserve my equity ratio and even restore my dividend rights."

If the company has completed the industrial and commercial change registration and the capital increase funds have actually been in place, can the original equity ratio still be restored?

Answer: It is possible to fight for it. The Supreme People's Court has clarified in its guiding cases that if a capital increase infringes upon shareholders' preemptive subscription rights, even if the capital increase funds have already been paid in and the industrial and commercial registration changes have been completed, the affected shareholders still have the right to claim the exercise of preemptive subscription rights according

Mr. Zhang, a shareholder of an e-commerce company in Futian District, Shenzhen, recently encountered a similar situation. His shareholding ratio was diluted from 25% to 10%, but he had not yet lost control. When he consulted Zhiming Law Firm, he asked: "What is the difference between my situation and Chen Hang's

Similar equity disputes also occur frequently in districts such as Longhua and Bao'an in Shenzhen. Public data from the Shenzhen Market Supervision Administration shows that in 2023, administrative litigation and administrative reconsideration cases triggered by equity disputes in commercial entity registration changes in Shenzhen increased by about 35% compared with 2022. The common pattern of these cases is that the tactics of major shareholders are becoming increasingly "refined," but the legal bottom line will not change because of the complexity of those tactics. The shareholders' preemptive right to subscribe is an inherent right granted by the Company Law and is not lost due to the level of shareholding or the number of voting rights.

Chen Hang later reviewed this experience at a friend's gathering and said: "At the most dangerous moment, I even thought about giving up outright and starting a new business. Fortunately, Director Shen of the law firm kept telling me, 'Equity is your life and livelihood. Procedural violations are procedural violations. With a complete chain of evidence, you can turn things around.' That's why I persisted." The 40% equity he ultimately retained corresponds to a current company valuation of about 15 million yuan.

If you are also facing difficulties such as partner betrayal, equity dilution, or shareholder rights being sidelined, it is recommended to do two things first: First, immediately review the company's articles of association to understand the specific provisions on capital increase, capital reduction, and equity transfer; Second, keep well-preserved originals of all past shareholders' meeting notices, attendance sheets, and resolution documents. Equity disputes are fundamentally evidence battles, and every procedural document you hold is a legal weapon. Guangdong Zhiming Law Firm has been deeply rooted in the Shenzhen legal market for 26 years, handling over 10,000 cases cumulatively, with a large number of successful practical cases in the field of equity disputes. You are welcome to visit us in person at Room 1802, Tower A, Xintian Century Business Center, Shixia North Second Street, Futian District, Shenzhen, or call the hotline 0755-25986969 to discuss your specific case with Attorney Shen Jinlong's team.