Partners Turn Against Each Other and Equity Is Diluted to 5%: How Can a Shenzhen Boss Preserve 40%? An Equity Lawyer Answers Four Real Questions

Last Wednesday afternoon, Mr. Zhang, who is in the smart hardware business, came to Room 1802, Tower A, Futian Xintian Century Business Center. The first thing he said after sitting down was: Attorney Shen, in 2019 I started a company with two college classmates. I contributed technology and held 40%. Now one of them wants to increase capital and issue new shares to dilute me to 8%, and the other wants to remove me from the board of directors. Do I have no choice but to accept it?

Mr. Zhang’s experience is not an isolated case in Shenzhen. Equity dispute cases in Shenzhen have grown by about 20% annually, and the proportion involving contests for corporate control has risen year by year. Many founders with technical or resource-based backgrounds keep their heads down running the business and lack sensitivity to equity structures and the protection of shareholder rights. Only when conflicts erupt do they discover that their bargaining chips are pitifully few. Today, in a Q&A format, I will break down and explain clearly the four questions people ask most often.

Q1: If the partners have had a falling out, can I directly transfer the money in the company account away first to protect myself?

Absolutely not. This is the mistake many shareholders are most likely to make when emotionally charged. Funds in a company account are the property of the company as a legal person, not the shareholders’ personal property. Transferring them without authorization may constitute occupational embezzlement; what was originally a civil equity dispute may instead expose you to criminal risk.

The correct approach is to first preserve evidence. This includes the articles of association, shareholders’ meeting resolutions, proof of capital contribution, WeChat chat records, and email correspondence. In particular, the minutes of the meeting at which the other party proposed the capital increase and share expansion plan are key to determining whether there was malicious dilution. Then, pursuant

Q2: The company wants to increase capital and expand shares. I disagree but hold few shares. How can I determine whether it is malicious dilution?

Last year, a case we handled for a technology company in Nanshan was highly representative. Our client, Engineer Li, held a 40% equity interest, while the other two shareholders held 60% combined. They proposed an RMB 8 million capital increase at an extremely low price. Engineer Li expressly stated that he was willing to participate in the capital increase on a pro rata basis, but the other party, citing that the funds had to be received within three days, actually gave him only one day to raise funds. In the end, Engineer Li participated in only a small part of the capital increase, and his equity interest was diluted from 40% to 12%.

After we became involved, we focused on three points: first, whether the capital increase price was fair and whether an asset valuation had been conducted; second, whether the subscribed capital contribution deadline given to Engineer Li was consistent with that of the other shareholders; and third, whether the actual use of the capital increase proceeds was necessary for the company’s operations. The court ultimately found that this capital increase constituted malicious dilution and ruled that the capital increase was not effective against Engineer Li, preserving his 40% equity interest. This case shows that in determining malicious dilution, the question is not what the other party says, but whether the procedure was fair, the price reasonable, and the deadlines equal.

Q3: If shareholder rights are infringed, are there any faster options besides going to court?

Yes. Shenzhen courts and commercial mediation institutions have a relatively mature pre-litigation mediation mechanism for equity disputes. If the disputed amount is below RMB 50 million and the parties still have a basis for communication, they can go through mediation first. We had a client in Longhua whose shareholders had been fighting for half a year over dividends. Through mediation, an agreement was reached in 21 days, and the other party repurchased his 15% equity at a price more than RMB 2 million higher than he had expected.

But if the other side is determined to force you out—for example, by unilaterally changing the legal representative, transferring core assets, or blocking access to financial data—do not hesitate to file suit and seek property preservation. The cost of delay is often far higher than attorney fees. The Shenzhen Intermediate People's Court and the Futian and Nanshan courts have relatively extensive adjudication experience with this type of corporate control dispute; the key is whether your chain of evidence can prove that your rights have been substantially infringed.

Q4: How can equity dilution be prevented in advance, and are there any documents that must be signed?

Actually, the most essential ones are just three documents: the articles of association, the shareholders’ agreement, and the capital increase and share expansion agreement. Anti-dilution clauses can be included in the articles of association, for example, when the company increases capital, the original shareholders have the right to subscribe preferentially in proportion to their shareholding, and the subscription period shall not be shorter than that of other shareholders; in the shareholders’ agreement, a veto power over major matters can be agreed upon, for example, capital increase, merger, division, and dissolution must be unanimously approved by all shareholders.

I often tell entrepreneurs that the cost of hiring a lawyer to write these documents is less than a fraction compared to the cost of going to court in the future. Guangdong Zhiming Law Firm has been rooted in Shenzhen for 26 years and has represented a large number of cases. Director Shen Jinlong, a lawyer with 22 years of practice experience, holds a master's degree from Fudan University, is an economist, and has also worked as a senior executive in state-owned enterprises. His understanding of equity structure and corporate governance is not only at the legal level. Our law firm has accumulated over 20 years of experience in handling complex cases, emphasizing the combination of emotions, reason, and law. When dealing with corporate control disputes, we not only fight lawsuits, but also help parties find the best solution from the perspectives of business logic and evidence chain.

If you are dealing with partners falling out, your equity being diluted, or your shareholder rights being sidelined, you can start with a phone call to talk it over: 0755-25986969. Address: Room 1802, Tower A, Xintian Century Business Center, Shixia North 2nd Street, Futian District, Shenzhen. In many cases, intervening a month earlier could have led to a completely different outcome.