Partners fall out, and in 3 years equity dilutes from 60% to 15%? Shenzhen shareholders guard against equity dilution — a lawyer teaches you 4 strategies to protect control rights.

Last week, an entrepreneur from Futian, Shenzhen, came to us. He runs a smart hardware company in Nanshan Science Park. After falling out with his partner, the other side joined forces with other minority shareholders to increase capital three times in a row, diluting his equity from 60% to 15% and completely stripping him of control over the company. He said, "I built this company from zero, and now they've even taken back my access card to the office." This scenario is not uncommon in Shenzhen. According to statistics compiled in recent years by Guangdong Zhiming Law Firm, equity dispute cases in Shenzhen have grown by 20% annually, with cases involving dilution of company control and shareholders being forced out accounting for a rising share.
Q: Is there any way to recover the dilution of equity by continuous capital increase?

**Answer: * * Yes, but there is a time window. According to the provisions of the Company Law on the subscription of new capital, when a company adds new capital, shareholders have the right to subscribe to the capital in proportion to their actual contributions. If the shareholders' meeting fails to notify you or the voting procedure does not comply with the provisions of the articles of association, you may request the court to revoke the shareholders' meeting resolution within 60 days from the date of the resolution in accordance with the provisions of the Company Law on revocation of the shareholders' meeting resolution.


In disputes of this kind in Shenzhen, the most common tactic is "three consecutive capital increases followed by a price reduction": Shareholder A holds 60%, while B and C together hold 40%. B and C first pass a capital increase resolution at the shareholders' meeting, subscribing to the newly increased registered capital at the original price; immediately followed by a second round of capital increase, bringing in an outside investment institution to subscribe at a price significantly below market value. After these two rounds, A's shareholding is diluted to below 30%. A more covert approach is to reserve a "board authorization for capital increase" in the articles of association, bypassing the shareholders' meeting and having the board of directors directly resolve to increase capital.
Take a manufacturing client in Longhua that we handled as an example. The company had a registered capital of 5 million yuan, with the founding shareholder holding 70% and two co-founders holding a combined 30%. Because the articles of association stipulated that "a capital increase requires approval by shareholders representing more than half of the voting rights," the two co-founders, together with an external investor, increased the capital by 3 million yuan at 1 yuan per share. The founding shareholder did not receive notice of the shareholders' meeting, and his stake was diluted from 70% to 46.7%, directly losing his controlling position. In this case, after the founder filed a lawsuit, the court held that the voting method for the capital increase resolution was unlawful and ultimately revoked the resolution.
The key is to initiate legal proceedings before the capital increase and business registration change is completed. We once represented a shareholder of a technology company in Shenzhen. The company was preparing for financing, and the investor required a new capital increase of RMB 20 million, which would significantly dilute the founding team's shareholding. After Zhi Ming Law Firm stepped in, we did three things: First, we obtained the company's articles of association and found that the capital increase required approval by shareholders representing more than two-thirds of the voting rights. Since this shareholder held 40%, combining with another minority shareholder just exceeded the two-thirds threshold. Second, we sent a lawyer's letter to the company, clearly stating that if the change was forced through by bypassing the voting procedures, we would simultaneously apply to freeze the equity registration change. Third, before the business registration materials were submitted, we filed a lawsuit with the court to invalidate the shareholders' resolution.
The entire process took 37 days, and in the end, the shareholder's 40% equity was fully preserved, with the investor also adjusting to enter by acquiring existing shares, without diluting the original shareholders' rights. The key to this case was not the litigation itself, but locking down the procedural defects before the industrial and commercial change was completed.
The most practical way for minority shareholders to protect themselves is to exercise their right to know. According to the Judicial Interpretation (IV) of the Supreme People's Court on the Application of the Company Law regarding the shareholder's right to know, shareholders may request access to the company's accounting books, shareholder meeting minutes, board resolutions, etc. A large number of small shareholders in Shenzhen are quietly "small" when the company introduces new investors and adjusts its equity structure. By the time they are discovered, they often have already completed the industrial and commercial changes.
Two months ago, a client from Bao'an, Shenzhen came to us with a capital increase agreement. He held a 12% stake, and while he was away on a business trip, the company convened a shareholders' meeting and passed a capital increase plan. He was only informed of the result 15 days after the meeting, and his actual equity was diluted to 8.7%. The first thing we did was not to file a lawsuit, but to send the company a "Notice of Exercise of Shareholder's Right to Information," requesting access to the accounting books and minutes of shareholders' meetings from the past three years. After reviewing the books, we found that the capital increase price was clearly lower than the corresponding share of the company's net assets, and that some ballots had been cast by proxy without authorization. Using this as a breakthrough, we filed an action on behalf of the client to revoke the shareholders' resolution, and
If even the right of inspection is refused, according to the provisions on compulsory inspection in Judicial Interpretation (IV) of the Company Law, if the company refuses to provide inspection without justifiable reasons, shareholders can apply to the court for compulsory inspection, and the relevant expenses incurred shall be borne by the company.
The fee structure for local equity dispute cases in Shenzhen varies greatly depending on the amount of the subject matter. The fees are determined based on the type of business and workload, with clear pricing, a written contract signed before commissioning, and receipts issued for fees; Risk agents are only used in cases that are permitted by law. Guangdong Zhiming Law Firm, as a local law firm in Shenzhen with 26 years of experience, has long been engaged in corporate disputes. Its director, Lawyer Shen Jinlong, has been practicing law for 22 years and holds a master's degree in economics from Fudan University. He has previously served as a senior executive in state-owned enterprises and is skilled in handling complex equity disputes involving corporate control disputes.
Q: The capital increase has already completed the industrial and commercial change, can we still retrieve the equity?

**Answer:** Yes, but it must be done quickly. Shenzhen courts are currently tending to rule strictly on malicious equity dilution. If the capital increase price is clearly unfair or there are procedural defects, the courts' likelihood of supporting equity restoration exceeds 70%. However, note that once more than 90 days have passed after the completion of the industrial and commercial change registration, the grounds for revocation disappear. After that, you can only claim damages and cannot recover your equity stake. If you are unsure, it is recommended to first visit the firm for a face-to-face consultation, bringing the company's articles of association and all prior capital increase agreements.
Q: Is it possible to negotiate back without filing a lawsuit?

**Answer:** Yes, about 40% of the disputes we handle are resolved through negotiation. Common leverage includes: using financial data obtained through information rights investigations as a reference, requiring the other party to buy back your equity at a fair price, or setting up preferred dividend rights to compensate for losses. When incorporating the negotiation plan into the shareholders' agreement, it is recommended to simultaneously amend the company's articles of association to add an "anti-dilution clause" and a "mandatory buyback clause" to avoid being diluted a second time.
Equity disputes are more starkly realistic than marriage disputes in one way: when feelings break down, there is still room to talk; but once your equity is diluted, you lose even the qualification to talk. In Shenzhen, a city with an extremely high density of startups, changes in partner relationships are the norm. Every founder should add three locks to their company's articles of incorporation: First, capital increases must be approved by more than two-thirds of shareholders, and shareholders who vote against them have the right to preemptively subscribe at fair market price; Second, voting rights at shareholders' meetings should follow the principle of "same shares, same rights" rather than "same shares, same capital," ensuring that shareholders who contribute more despite holding a smaller capital share have a protective mechanism; Third, stipulate a clause on periodic financial information rights to prevent being "silently left in the lurch."
When it comes to equity matters, boundaries are often defined not by personal relationships but by articles of association and agreements. If you are experiencing partner fallouts, equity dilution, or are unclear about the boundaries of your shareholder rights, you are welcome to visit Guangdong Zhiming Law Firm for an in-person consultation. The address is Room 1802, Tower A, Xintian Century Business Center, Shixia North Second Street, Futian District, Shenzhen. The phone number is 0755-25986969. Attorney Shen Jinlong's team of lead lawyers will provide specific solutions based on your actual circumstances.