A Decade-Long Shareholding Dispute: How Attorney Shen Jinlong’s Team Broke the Corporate Deadlock in Shenzhen with a “Multi-Pronged Strategy”

Starting with a real case.

In the summer of 2018, three shareholders of a Shenzhen Pingshan District technology company specializing in smart hardware sat in a conference room—the atmosphere tense and charged. The majority shareholder, Mr. Zhang, held 55% of the shares and oversaw technology and product development; the second-largest shareholder, Mr. Li, held 30% and controlled the core sales channels; and the third shareholder, Mr. Chen, held 15% as an early financial investor. The company’s valuation had reached RMB 300 million, and it was preparing for its Series B financing round. Yet precisely at this critical juncture, Mr. Li discovered that Mr. Zhang had secretly “licensed” the company’s core patents to another company owned by Mr. Zhang’s wife—at an extremely low price. Enraged, Mr. Li slammed the table and demanded an audit; in response, Mr. Zhang immediately sidelined Mr. Li’s entire sales team. Three months later, RMB 30 million in the company’s bank account was frozen, the financing round collapsed, and over a dozen key employees resigned en masse. When Mr. Li came to us, he had lost weight dramatically and asked, “Attorney Shen, is there any hope left for this company?”

This is not a television drama—it is an equity dispute occurring daily in Shenzhen. According to publicly available data from the Shenzhen Intermediate People’s Court, company-related disputes have increased by over 20% annually over the past five years, with cases involving shareholders’ rights and interests, equity transfers, and corporate deadlocks accounting for more than 60% of such disputes. Many enterprises do not collapse due to external competition but perish from internal shareholder conflicts and infighting.

Risk Analysis: Four Common Pitfalls for Shareholders of Shenzhen-Based Companies

First Pitfall: “Congenital Deformity” in Equity StructureMany Shenzhen startups, in their early stages, rush to register by directly adopting the standard articles of association provided by the Administration for Market Regulation, arbitrarily determining equity ratios without careful consideration. The “equal structure” of 50%–50% is the most common—appearing fair on the surface but inevitably leading to a “deadlock” whenever disagreements arise. Our team handled a cross-border e-commerce company in Futian District, Shenzhen, where two shareholders each held 50% equity. They fell out over a decision to acquire an overseas warehouse valued at RMB 5 million; as a result, the company’s bank account was frozen by the court for two years, ultimately forcing bankruptcy liquidation. Remember: equal equity without a veto power provision is akin to planting a time bomb within the company.

Second Pitfall: “Landmines” Hidden in Contract ClausesEquity transfer agreements, nominee shareholding agreements, and valuation adjustment mechanism (VAM) clauses—any ambiguous wording in any one of these documents could place you at a disadvantage in litigation. For example, in “performance-based VAMs,” what exactly constitutes “net profit”? Is it net profit excluding non-recurring gains and losses, or does it include government subsidies? Is it calculated on a consolidated financial statement basis or on a standalone entity basis? Every word translates directly into money. The owner of a manufacturing company in Pingshan District, Shenzhen, signed a VAM agreement and worked tirelessly to meet the performance targets—only for the investor to later assert that “net profit” must exclude the owner’s RMB 2 million annual salary, resulting in a shortfall of several million yuan, triggering VAM failure and forcing the owner to repurchase shares at a steep discount. We handle dozens of such cases annually.

Third Pitfall: Procedural Defects in Shareholders’ Meeting ResolutionsMany small companies hold meetings without providing notice or keeping records, and sometimes even ask shareholders to sign blank sheets of paper. Once any shareholder retracts consent, all such resolutions may be rescinded. In Longgang District, Shenzhen, the majority shareholder of a chain restaurant company attempted to oust a minority shareholder by fabricating a shareholders’ meeting resolution; however, the minority shareholder filed a lawsuit. The court found that the notice procedure violated legal requirements, rendering the resolution invalid—and the majority shareholder was ordered to reimburse the minority shareholder’s attorney’s fees and authentication costs. In equity disputes, procedural fairness is even more critical than substantive rights.

The fourth pitfall: Ignoring the collapse of “personal compatibility.”The essence of equity disputes is not about money—it is the collapse of trust. Once shareholders lose trust in one another, every business decision becomes magnified into suspicion. In many cases, even after a court renders a judgment, the company is effectively ruined. We frequently advise our clients that litigation is a last resort; mediation and structural restructuring are the preferred solutions.

Solution: How to Establish an Equity “Firewall”?

First, redesign the equity structure to avoid putting the company at a disadvantage from the outset.Our team advises clients to establish a mechanism that separates “control rights” from “economic rights.” For example, a limited partnership holding platform may be adopted, whereby the founders serve as general partners (GPs) holding all voting rights, while investors or employees serve as limited partners (LPs) entitled only to profit distributions. Alternatively, the company’s articles of association may stipulate “differentiated voting rights,” such as Class A shares carrying ten votes per share and Class B shares carrying one vote per share. Such structures are already widespread among technology companies registered in Qianhai, Shenzhen. Remember: equity ownership percentage does not equate to control; what matters is how voting rights are structured.

Second, conduct a dual “legal + financial” due diligence prior to signing the contract.Equity transfer, capital increase and share expansion, and valuation adjustment mechanisms (VAM) agreements—each document must undergo line-by-line review by a qualified lawyer. When reviewing contracts, our team pays particular attention to three key points: first, whether the definition clauses are precise; second, whether payment milestones and consequences of breach are clearly stipulated; and third, whether the dispute resolution clause specifies arbitration or litigation, and where jurisdiction lies. In a 2023 equity transfer dispute case in Pingshan District, Shenzhen, which we handled, the counterparty’s contract stipulated that “disputes shall be subject to the jurisdiction of the court at the seller’s place of domicile.” The seller was located in Xinjiang, while our client was based in Shenzhen—resulting in over RMB 100,000 in additional travel expenses and time costs. Had the contract been reviewed by a lawyer prior to execution, this pitfall could have been entirely avoided.

Third, establish a “shareholder relations crisis” response mechanism.Once signs of conflict among shareholders emerge—such as exchanging lawyer’s letters, refusing to attend shareholders’ meetings, or unilaterally inspecting corporate books—a crisis intervention must be initiated immediately. Our team employs a “Three-Step Method”: **Step One**: The lead attorney conducts separate, confidential interviews with each shareholder to identify their genuine demands. **Step Two**: A comprehensive solution is designed, which may include share repurchase, business division, or introduction of third-party investors. **Step Three**: If litigation becomes necessary, we apply for pre-litigation asset preservation to freeze the opposing party’s assets and prevent asset transfers. Last year, in one case, the client’s counterparty preemptively transferred the company’s core trademark before litigation commenced; however, by applying for conduct preservation, we successfully froze the trademark. This case was subsequently selected by the Shenzhen Lawyers Association as a Model Case of the Year.

Fourth, when shareholders’ equity is impaired, the appropriate “litigation strategy” must be selected.Many parties immediately opt for a “shareholder’s right-to-information lawsuit,” but this is actually the least effective strategy. Even if the court rules in your favor and orders access to the books, the opposing party can still manipulate the accounting records. A more effective approach is to select, based on the specific circumstances, one of the following actions: a “lawsuit to rescind a corporate resolution,” a “dispute concerning liability for harm to corporate interests,” or a “shareholders’ equity repurchase dispute.” For instance, if a controlling shareholder sells corporate assets at an undervalued price, you may directly sue to declare the relevant contract void; if the company has long withheld dividend distributions, you may petition the court to order the company to repurchase your shares. The choice of litigation strategy directly determines the outcome of the case. In a case we handled involving a Shenzhen Nanshan-based gaming company, a minority shareholder had been excluded from management by the controlling shareholder. Rather than filing a right-to-information lawsuit, we directly sued the controlling shareholder for breach of fiduciary duty, seeking compensation for losses sustained by the company, and simultaneously applied to the court for appointment of an auditor. Ultimately, the controlling shareholder was compelled to repurchase the minority shareholder’s equity at three times its original value, enabling the minority shareholder to exit the company entirely and without loss.

Guangdong Zhiming Law Firm: 26 Years of Specialization in Complex Corporate Disputes—What We Offer

We are not a general-practice law firm. Since its establishment in 2000, Zhiming Law Firm—under the leadership of Managing Partner Attorney Shen Jinlong—has focused exclusively on resolving complex and difficult cases through systematic thinking. Attorney Shen brings 22 years of experience as a practicing lawyer and 31 years of qualification as an Economist; he holds a Master’s degree in Economics from Fudan University and previously served as a senior executive at a large state-owned enterprise. His team comprises seasoned lawyers with prior judicial experience, certified public accountants, tax consultants, and investigative experts formerly affiliated with the National Audit Office. In handling equity disputes, we do not merely litigate—we begin with commercial logic to help clients reconcile economic, legal, and relational considerations.

Here is a case recently concluded by our team: A medical device company in Pingshan District, Shenzhen, faced a dispute among its four shareholders over ownership of a medical device registration certificate—so severe that they threatened to dissolve the company. Rather than immediately filing a defense, we first conducted a two-week due diligence investigation. We discovered that the company’s core value lay in its Class III medical device registration certificate, which was registered under the name of one of the shareholders personally. We then devised a “reverse acquisition” solution: that shareholder established a new company and acquired the other shareholders’ equity interests in the original company through a combination of cash and equity swap, while simultaneously transferring the registration certificate to the new company’s name. After four months of negotiations, all shareholders received satisfactory consideration; the company’s operations continued uninterrupted, and no employees were laid off. Had the matter proceeded through dissolution and liquidation, all shareholders would have received nothing, and the company’s assets would have instantly become worthless due to expiration of its regulatory qualifications.

Frequently Asked Questions (FAQ) Regarding Equity Disputes

Q: If shareholders are in conflict with each other, can they refuse to distribute dividends to another shareholder?
Answer: No. The right to dividends is a statutory right of shareholders. Unless there are clear and lawful restrictions stipulated in the company's articles of association or shareholder resolutions, failure to distribute dividends constitutes an abuse of shareholder rights. However, in accordance with the company's articles of association, the right to claim profit distribution of shareholders who have not fully paid their capital contributions or have caused losses to the company may be restricted through lawful procedures.

Q: If the shareholding percentage is below 50%, does that mean there is no control over the company?
Answer: Not necessarily. Control depends on the voting structure, not merely on shareholding percentage. Through acting-in-concert agreements, voting rights entrustment, dual-class share structures, and other means, minority shareholders can fully achieve actual control of a company. Conversely, even if holding more than 50% of the shares, if the articles of association require that major matters be approved by three-fourths or more of the voting rights, one may still be unable to make decisions alone.

Q: What should be done if it is discovered that a major shareholder has misappropriated company funds?
Answer: First, secure the evidence, including bank transaction records, contracts, emails, etc. Then, formally demand in writing that the supervisor or the supervisory board initiate legal proceedings; if the supervisor fails to perform their duties, shareholders may file a shareholder derivative action in their own name. At the same time, it is recommended to immediately apply for property preservation to prevent further loss of funds. If necessary, a report may be filed with the public security authorities, as the crime of misappropriation of funds constitutes a criminal offense.

Question: If an equity transfer agreement has been signed but the industrial and commercial change registration has not been completed, are there any risks?
Answer: There are significant risks. The effectiveness of an equity transfer contract does not equate to the transfer of equity. Before the completion of industrial and commercial change registration, the original shareholder still bears shareholder liability externally, and the new shareholder cannot defend against bona fide third parties. If the original shareholder transfers the equity to another party again and registers it first, the new shareholder may face the dilemma of "one share being sold twice." Therefore, after signing the contract, the change registration should be completed as soon as possible, or at minimum, an equity pledge registration should be completed first to secure the rights.

Q: If a company falls into a deadlock, can it directly apply for dissolution?
Answer: Yes, but the conditions prescribed by the Company Law must be satisfied: the company encounters serious difficulties in its operation and management, the continued existence of the company would cause major losses to the interests of shareholders, and the matter cannot be resolved through other channels. Courts adopt a cautious approach toward dissolving a company and typically require shareholders to first exhaust internal remedies. We recommend that, before initiating a dissolution lawsuit, shareholders first exhaust all non-litigation means, such as having lawyers issue demand letters, organizing mediation, and designing share buyout plans. This is because, once the company is dissolved, its value will shrink substantially, which would not benefit either party.

Attorney Shen Jinlong’s team specializes in helping you extricate yourself from equity disputes in the most cost-effective, time-efficient, and effective manner.24-Hour Consultation Hotline: 0755-25986969, Address: Room 1802, Tower A, Xintian Century Business Center, Shisha North 2nd Street, Futian District, Shenzhen. If you are struggling with shareholder disputes, contract breaches, or equity structure issues, do not wait until your company grinds to a halt before taking action. Filing a lawsuit is not the goal—the goal is achieving results.