When partners fall out and equity is diluted to 6%, what can a Shenzhen shareholder rely on to turn the tables in defending their rights? 40% was saved.

Mr. Li from Nanshan, Shenzhen came to our office last week, his complexion even worse than the white walls of the office. In 2018, he partnered with a friend in cross-border e-commerce, contributing 40% of the capital but not participating in day-to-day operations. Earlier this year, he wanted to review the accounts and discovered that the company had secretly completed three rounds of capital increases, diluting his shareholding from 40% down to 6.3%. What's more troublesome is that the other party held up the amended articles of association, which prominently bore his "own" signature—of course, it was signed on his behalf.

This case is not an isolated one. We analyzed the judgments from Shenzhen's two-level courts over the past three years, and found that among equity disputes, those involving capital increase dilution and control contests rose from 31% in 2021 to 47% last year. Shenzhen's equity dispute cases have grown at an average annual rate of 20%, with more than half occurring in startups around Nanshan Science Park and Futian CBD—companies whose valuations look impressive on paper but are already fraught with internal conflict.

Why is it always you who gets "diluted"?

To be blunt, most founders sign capital increase agreements and articles of association that are just templates downloaded from the internet. They include "pro-rata dilution" but fail to specify the decision-making process for capital increases, the exercise period for preemptive rights, or even anti-dilution clauses. By the time major shareholders team up with external investors for a low-priced capital increase, your equity is like water-injected pork—it looks intact, but the substance is completely gone.

When courts in Shenzhen handle such cases, they focus on three key points: whether the voting procedure for the capital increase resolution was lawful, whether the notice was properly served, and whether you explicitly waived your preemptive rights within a reasonable period. Article 34 of the Company Law clearly states that shareholders have the right to subscribe to new capital in proportion to their paid-in capital contributions, unless all shareholders agree otherwise. Many shareholders who end up diluted often stumble on the phrase "all shareholders agree otherwise"—a clause may have been slipped into the articles of association stating that "a capital increase may be approved by a two-thirds majority vote of the shareholders' meeting," and you signed it without reading carefully.

How was the 40% equity preserved? The key lies in "procedural defects."

Back to Mr. Li's case. The first thing we did after taking it on wasn't rushing to file a lawsuit, but rather obtaining the complete internal corporate records of those three capital increases from the Shenzhen Market Supervision Administration. Sure enough, the EMS waybills for the three shareholder meeting notices showed the recipient address as the old residence Mr. Li had moved out of three years ago. This is where it gets interesting—the company knew his actual address, yet deliberately sent the notices to the outdated one. In legal terms, this is called "malicious evasion of service," and procedurally, it doesn't hold up.

Additionally, regarding the "signature by proxy" on the amendment to the articles of association, we applied for judicial authentication. Although the opposing party argued that "Mr. Li verbally agreed," Article 143 of the Civil Code clearly establishes the requirements for the validity of civil legal acts—without a genuine expression of intent, the signature is invalid. In the end, the court ruled that the three capital increase resolutions were null and void, and Mr. Li's equity stake was restored to 40%. From the filing of the case to the second instance upholding the original judgment, it took 14 months.

Don't wait until you've lost your equity to think of a lawyer.

To be honest, shareholders in Shenzhen generally have a common misconception: they think that as long as their names still appear on the business registration as shareholders, everything is fine. But in equity disputes, the most feared scenario is the "boiling frog" effect—the other party dilutes your stake by 5% each year, and by the time you realize it, you may have almost lost the qualification to file a shareholder derivative lawsuit (when your shareholding falls below 10%, many claims become restricted).

In daily operations, several warning signs should raise red flags: the company has not paid dividends for two consecutive years while executive compensation has doubled, a sudden notice of "strategic financing" arrives without an investor due diligence report, or a charter amendment requires you to sign within three days or be deemed to have consented—these are all typical pre-dilution maneuvers. By the time your equity is fully diluted and you seek legal recourse, the only tool left is a lawsuit under Article 20 of the Company Law for abuse of shareholder rights, where the burden of proof doubles and the process takes at least two years.

问：If you discover that your equity has been diluted, should you negotiate first or file a lawsuit directly?
答：First, review the resolution documents in the internal business registration files. If there are obvious procedural flaws (such as failure to deliver notices or forged signatures), filing a lawsuit directly gives you a better chance of winning, while negotiation would only give the other party time to correct the procedures. However, if the other party has completed the formal process, it is advisable to first send a lawyer's letter to secure written evidence of "reserving the right to pursue legal action," and then proceed with negotiations.

At the end of the day, equity disputes aren't won by who shouts the loudest, but by who has the more complete chain of evidence. If you're in Shenzhen, whether your company is registered in Futian or Nanshan determines which court has jurisdiction, and there are subtle differences in judicial standards—for instance, the Futian Court is stricter than Nanshan when reviewing whether a "notice was effectively served." So don't just copy templates from the internet. Bring your articles of association and shareholder meeting resolutions, and come talk to the team led by Director Shen Jinlong at Guangdong Zhiming Law Firm (Room 1802, Building A, Xintian Century Business Center, Shixia North Second Street, Futian District, Shenzhen). Director Shen holds a master's degree from Fudan University and has been practicing law for 26 years. His独创 "Zhiming Artistic Litigation Method" has won dual innovation awards from both the provincial and municipal bar associations, and he has handled over 1,000 equity dispute cases. Phone: 0755-25986969. When it comes to equity, if you wait until it's been diluted to nothing before panicking, all that's left is truly just "panic."