Partners Fall Out and Equity Is Diluted to 3%? Three Key Choices a Shenzhen Boss Made to Keep 40% Equity

At the end of last year, a company in Nanshan Science and Technology Park in Shenzhen that makes smart hardware came to us. Founder Mr. Zhang held 40% of the shares, while the other two partners together held 60%. The company had just received a Series A financing letter of intent, with a valuation of 120 million yuan, when one of the partners suddenly proposed a capital increase and share expansion. Under the plan, Mr. Zhang's equity would be diluted directly from 40% to less than 3%. Mr. Zhang said that for those few days he could not sleep all night, tossing and turning over just one question: how could a brother he had worked alongside for five years suddenly want to push him out?

This is not an isolated case. Equity dispute cases in Shenzhen have been growing at about 20% annually, with a marked rise in the proportion involving fights for corporate control. Many bosses, when signing partnership agreements, think, "We're all brothers—spelling things out in such detail hurts the relationship." By the time they fall out, they discover that what gets hurt isn't the relationship, but their wallets and their say.

First, figure out: what kind of equity infringement are you facing?

Equity disputes are not a single, all-encompassing concept, and the paths to protecting one's rights are completely different. There are three common types:

The first category isMalicious dilutionBy means such as low-price capital increases and bringing in related parties to subscribe, your shareholding ratio can be diluted. The second category isPower rendered nominalFor example, not notifying you to attend the shareholders' meeting, forging signatures to make resolutions, or transferring the company's core assets to affiliated companies. The third category isDividend blockadeThe company is clearly profitable, yet the major shareholder makes the profits disappear by inflating costs and engaging in related-party transactions, leaving minority shareholders with not a single cent for years.

What Mr. Zhang encountered was the first type, and also the most dangerous—because once the industrial and commercial registration change is completed, if you then go to court, the difficulty of producing evidence and the length of the process will increase exponentially.

Comparison of rights protection paths: sending a letter, litigation, or negotiation—which one to pursue first?

When handling such cases, we usually give clients three options for evaluation:

Path One: Attorney's letter + industrial and commercial objection.This is suitable for the early stage of infringement, when the other party is still testing the waters. It is low-cost and fast, and the key is to exploit the timing gap to block the industrial and commercial change registration. But if the relationship has already completely fallen apart, the other party often will not fall for this.

Path Two: File a lawsuit directly.The common causes of action are "disputes over confirmation of the validity of company resolutions" or "disputes over liability for harming shareholder interests." The advantage is that you can apply for property preservation, freezing equity and accounts, forcing the other party back to the negotiating table. But the timeline typically starts at six months, and scheduling for such cases at the Shenzhen Futian Court is sometimes even longer.

Path Three: Promoting negotiations through litigation.This is the strategy we use most often. Litigation is not the goal; it is leverage. Once the case is filed, the other party realizes that proceedings have been initiated and the evidence has been locked in, which actually makes them more willing to sit down and negotiate a price or solution acceptable to both sides.

Regarding Mr. Zhang's situation, we recommend Path Three. On the day the case was filed, we simultaneously applied for a behavioral preservation order to prohibit the company from processing the industrial and commercial registration changes for capital increase and share expansion. The opposing party proactively reached out to arrange mediation on the third day after receiving the court summons.

Evaluation dimensions: What to focus on when choosing a lawyer

Equity disputes place completely different demands on lawyers compared to ordinary contract disputes. I suggest evaluating from three dimensions:

See if there is any experience specializing in corporate law.Equity-related cases involve the application of core provisions such as Articles 20, 22, and 34 of the Company Law, and also entail multi-layered legal relationships among the articles of association, shareholder agreements, and industrial and commercial registration. You can't take them on just because you've handled a few contract disputes.

Let's see if we can throw a combination punch.Relying solely on litigation all the way through often means winning the case but not getting the money. Truly effective solutions usually combine multiple approaches, including litigation, negotiation, tax planning, and even criminal complaints (such as embezzlement).

Look at their familiarity with the local judicial environment in Shenzhen.The adjudication standards of district courts in Shenzhen vary when it comes to corporate disputes. For example, Nanshan Court has more experience with equity incentive disputes involving tech companies, while Futian Court is more familiar with shareholder qualification confirmation for financial institutions. Choosing a lawyer who regularly appears before these courts makes a complete difference in the efficiency of case filing, preservation, and enforcement.

Zhiming Law Firm's approach: Why can it retain 40%?

Regarding Mr. Zhang's case, after our team got involved, we did several things:

First, evidence preservation was completed within 24 hours. We retrieved the company's industrial and commercial files, articles of association amendments, and minutes of past shareholders' meetings from the past three years, and found that the other party had pushed the subscription price down to 30% of net assets in the capital increase plan, which was clearly below fair value.

Second, simultaneously initiate litigation and behavioral preservation. Based on the provisions of Article 22 of the Company Law regarding the revocation of resolutions, argue that the capital increase resolution procedure was illegal and its content infringed upon shareholders' preemptive subscription rights. The day after the preservation application was submitted, the industrial and commercial change was blocked.

Third, set up the negotiating table outside the courtroom. After the other party realized that the legal proceedings had been frozen and its financing progress was affected, it took the initiative to propose buying back part of Mr. Zhang's equity at a reasonable price, while retaining his board seat and 40% shareholding. From filing the case to signing the mediation agreement, it took 71 days in total.

The key to resolving this case quickly was that the preservation order was secured before the industrial and commercial registration change. Had it been three days later, the outcome could have been completely different.

Three Practical Suggestions for Bosses in Shenzhen

Firstly,The anti-dilution clause must be clearly stated in the partnership agreement.For example, it can be agreed that the capital increase price shall not be lower than 80% of the valuation from the most recent financing round, or that minority shareholders have a proportional preemptive right to subscribe to the newly added capital. Putting it in writing saves a hundred times the hassle of going to court after the fact.

Secondly,Develop the habit of regularly checking business registration records.You can check on the Shenzhen Market Supervision Administration's official website. Spend five minutes each quarter to see if there are any changes in shareholders, registered capital, or directors. Many infringements are discovered by the parties involved only months later, missing the optimal window for intervention.

Thirdly,When you notice warning signs, consult a lawyer first—don't confront them yourself over WeChat.Every word you send could become evidence against you later. Consult first, then act—the order cannot be reversed.

Equity disputes ultimately come down to evidence, timing, and strategy. In Shenzhen, where startup density is high and capital moves fast, partners who are sharing a meal today may end up in court tomorrow over a capital increase agreement. Setting the rules in advance and finding the right people when trouble hits matters more than anything. If you have specific questions, call Guangdong Zhiming Law Firm at 0755-25986969. Led by Director Shen Jinlong, they've handled over ten thousand cases in 26 years—equity matters are their specialty.