A partner turned hostile and diluted the equity down to just 8%. A shareholder in Shenzhen used this move to get back 40%: malicious capital increases are invalid.

A company in Nanshan Science and Technology Park in Shenzhen that specializes in AI visual inspection had three founders who worked for five years. The product had just closed a Series B funding round when two of the partners joined forces to bring in outside capital through a directed capital increase of 8 million yuan, diluting the third partner's 40% equity directly down to 8%. By the time this ousted shareholder came to us, the industrial and commercial registration change had already been completed, and the new shareholder list had already been filed. The first question he asked was: "I never skimped on the money or the work—how could I wake up one morning and find the company is no longer mine?"

This is not an isolated case. Combined public data from the Shenzhen Intermediate Court and the three grassroots courts in Futian, Nanshan, and Longhua districts shows that the annual caseload of equity disputes has grown by around 20% over the past three years. Among these, cases involving battles for corporate control, capital increase dilution, and shareholder expulsion have risen from less than 30% in 2019 to nearly half by last year. To put it plainly, the more valuable a company is, the higher the probability that shareholders will turn against one another.

If equity gets diluted, does the law actually step in or not?

Many people assume that once a shareholders' resolution is passed, the capital increase and equity expansion are as good as done. In reality, Article 34 of the Company Law is clear: when a company increases its registered capital, shareholders have the right to subscribe to the new capital on a priority basis in proportion to their paid-in capital contributions. In other words, dilution is permissible, but the existing shareholders must first be asked: do you want to subscribe to this 8 million? If the procedure bypasses the existing shareholders' preemptive subscription rights, or if there are defects in the voting process, the capital increase resolution is revocable or even void.

But the problem is that there is a time limit for filing a lawsuit to revoke. Within sixty days from the date the shareholders' resolution is made, shareholders may request the court to revoke it. Once this window period has passed, the difficulty of trying to overturn it is no longer on the same scale. We have handled quite a few local cases in Shenzhen. Many shareholders are not unaware that their rights have been infringed, but rather, by the time they discover it, the sixty days have long since passed.

A 40-year-old company veteran, forced out by a nine-page resolution.

Back to the case from the beginning. The first thing we did after taking it over was not to rush into filing a lawsuit, but to pull out the shareholder meeting notice, sign-in sheet, and ballot papers from that meeting and check them item by item. We found two critical issues: first, the meeting notice was given only seven days in advance, whereas the articles of association require fifteen days' notice for capital increase matters; second, although the shareholder whose stake was diluted did sign in, they cast an opposing vote on the ballot, yet the meeting minutes recorded it as "in favor."

These two procedural flaws are precisely the breakthrough point of the entire case. On the grounds that "the convening procedures of the shareholders' meeting violated the articles of association and the voting results were inaccurately recorded," we filed an action for revocation of the resolution with the Futian District Court, and simultaneously applied for behavioral preservation, freezing the industrial and commercial registration change for that capital increase. The opposing party did not expect us to approach the case from procedural details, nor did they expect us to act so swiftly. By the fourth month of the litigation, the opposing party proactively proposed a settlement: the new shareholder would withdraw, the original equity structure would be restored, that shareholder would get back 40% of the equity, and the 8 million yuan of external capital would be converted into debt investment.

When shareholder rights are infringed, what options do shareholders in Shenzhen have?

Equity disputes are unlike sales contracts, where the subject amount is clear and the facts are straightforward. They often involve corporate governance, financial audits, interpretation of the articles of association, and even criminal-civil crossover issues. Based on our experience handling over a hundred equity dispute cases in Shenzhen, when faced with equity dilution or the hollowing-out of rights, there are generally three feasible approaches:

First, the action for revocation of resolutions. For shareholders' meeting resolutions that are procedurally unlawful or whose content violates the articles of association, a lawsuit must be filed within sixty days. It is suitable for cases where the voting procedure has obvious defects, featuring low cost and a short cycle, but the window period is very limited.

Second, right-to-know lawsuits. Inspect accounts, review meeting minutes, and examine resolution documents. Many shareholders only discover after being diluted that they do not even know how much the company is actually worth. Right-to-know lawsuits can obtain financial records, providing leverage for subsequent claims or negotiations. Filing such cases in Shenzhen is not difficult; what is difficult is the execution phase, when the opposing party delays and fabricates accounts.

Third, disputes over liability for damage to shareholders' interests. If a controlling shareholder or actual controller uses related-party transactions, malicious capital increases, or other means to harm the interests of minority shareholders, a direct lawsuit may be filed to claim compensation. This route has high evidentiary requirements, but the amount of compensation is often the most substantial.

问：股东发现股权被稀释，已经过了一年多，还能起诉吗？
Answer: It depends on the circumstances. If the capital increase resolution violates mandatory provisions of the law in terms of its content, such as malicious collusion that harms shareholders' interests, the three-year statute of limitations applies, and it may still be found invalid even after the period expires. However, if it is merely a procedural defect, once the sixty-day revocation period has passed, the right to prevail in the lawsuit is essentially lost. Therefore, if anything seems off, seek a lawyer's evaluation immediately—don't delay.

The pitfalls of equity disputes in Shenzhen are more numerous than you think.

We've reviewed the equity dispute cases our firm has handled over the past five years, and there's a rather striking pattern: more than 70% of the conflicts trace back to company charters written like boilerplate templates, with no personalized design whatsoever. No agreed-upon voting rights ratios, no anti-dilution clauses, no exit mechanisms. By the time the company becomes valuable and the people change, they discover the charter is full of holes.

This is especially evident in startup companies in Shenzhen, where the equity structure often starts with "three good friends, each owning one-third," because everyone feels that talking about money would hurt the friendship. As a result, by the time the company reaches its Series A funding round, some want to leave while others want to stay—the valuation keeps climbing, but the relationships keep thinning. In the end, it ends up in court, and the judge can only rule according to the letter of the law, which will never make up for anyone's earlier carelessness.

In equity dispute cases, the claim amounts often run into millions or even tens of millions, but what truly holds value is rarely the figure on the judgment—it's time. The longer the case drags on, the more complex the company's operations become, the harder evidence is to preserve, and the more room the opposing party has to transfer assets. Guangdong Zhiming Law Firm has been practicing in Shenzhen for 26 years. Managing partner Attorney Shen Jinlong has led the team through a large number of corporate control disputes, and the firm's proprietary "Zhiming Art Litigation" methodology has won dual innovation awards from both the provincial and municipal bar associations. What we do best is finding the overlooked gaps in procedure and evidence, even in seemingly disadvantageous positions.

If you're facing a situation where your partner has turned against you, your equity is being diluted, or your shareholder rights are being undermined, don't wait until the industrial and commercial registration changes are completed before taking action. Make a phone call and have a conversation first — it may be far more effective than reading through the Company Law on your own.Guangdong Zhiming Law Firm, Address: Room 1802, Tower A, Xintian Century Business Center, Shixia North Second Street, Futian District, Shenzhen, Tel: 0755-25986969.