After three years of co-founding a startup in Shenzhen, the valuation has exceeded 100 million yuan, but my equity has been diluted to less than 5%. How can I break this deadlock?

Last Wednesday afternoon, in the meeting room on the 18th floor of Tower A, Xintian Century Business Center, Futian, Mr. Zhang, who runs a cross-border e-commerce business, slapped a thick stack of the company’s articles of association onto the table. In 2019, he and two university classmates started a business together in Nanshan Science and Technology Park. He contributed technology and held a 40% stake, while the other two put up money and each held 30%. Three years later, the company had reached a valuation of RMB 120 million, but on the eve of its Series B financing, he discovered that he held only 4.7% of the equity left. Through three capital increases and share expansions, the two partners had squeezed his percentage down little by little to ankle level. The first thing he asked me was: Attorney Shen, do I still have a stake in this company?

This is not an isolated case. Equity dispute cases in Shenzhen have grown by about 20% annually, and the share involving contests for corporate control has risen significantly. Many entrepreneurs believe everything is settled once they sign a Shareholders' Cooperation Agreement, but the real risks lie in subsequent capital increases, amendments to the Articles of Association, and shareholders' meeting resolutions. Below, I will break down the four questions clients ask most often.

Q1: Is it legal for a partner to increase capital without my consent and dilute my equity?

The key lies in two points: whether the capital increase procedures are lawful, and whether there is any malicious intent to dilute.

Article 43 of the Company Law provides that a resolution of the shareholders' meeting to increase the registered capital must be approved by shareholders representing at least two-thirds of the voting rights. If you hold 40% and the other two partners hold 60% in aggregate, they can indeed force through the capital increase resolution despite your opposition—provided that the procedures are compliant and the price is fair. The problem is that many malicious dilution maneuvers are accompanied by tactics such as low-price capital increases or the introduction of related parties.

For example, in Mr. Zhang’s case, the opposing party’s two capital increases were priced at 1 yuan per share and 1.2 yuan per share, while the per-share value corresponding to the company’s net assets during the same period had already reached 8 yuan. A capital increase so clearly below fair value was, in substance, using lawful procedures to conceal the purpose of infringing the rights and interests of minority shareholders. In this case, which we handled before the Shenzhen Futian Court, we ultimately helped Mr. Zhang retain his 40% equity ratio; the court found that the capital increase price was manifestly unfair and ordered a recalculation based on fair value.

Q2: If shareholders’ rights are infringed, are there any other avenues besides litigation?

Yes, and in many cases it is more effective than filing a lawsuit directly. Last year we represented a shareholder rights protection case involving a technology company in Longhua. The client held 35% of the shares and was deprived by the majority shareholder, through an amendment to the articles of association, of dividend rights and preemptive subscription rights. We took three steps: First, we sent a lawyer’s letter demanding inspection of the company’s accounting books and shareholders’ meeting resolutions—this is a statutory right conferred by Article 33 of the Company Law, and if the company refuses to provide them, an action may be filed. Second, we filed a complaint with the Shenzhen Market Supervision Administration regarding false signatures in the registration materials for the amendment to the articles of association. Third, after securing evidence, we filed a shareholder information rights action and an action to revoke the company resolution.

Once the three steps were completed, the other side voluntarily returned to the negotiating table and ultimately repurchased all of the client’s equity at a reasonable price. Put plainly, litigation is a bargaining chip, not the only way out.

Q3: How diluted does equity have to become before you completely lose your say?

Keep several key percentages firmly in mind. If you hold 10% or more of the shares, you may convene an extraordinary shareholders’ meeting on your own; if you hold 3% or more, you may submit an interim proposal ten days before the shareholders’ general meeting; if you hold 1% or more, you may bring a shareholder derivative suit. But if your equity is diluted to below 1%, these statutory rights will essentially be beyond your reach.

A more insidious risk lies in the anti-dilution clauses in the articles of association. Many startups in Shenzhen have articles of association that provide for pro rata capital increases, but in practice, by bringing in new shareholders and establishing dual-class share structures, the voting rights of original shareholders are squeezed to almost zero. According to our statistics, among corporate control disputes heard by the Shenzhen Intermediate People's Court in 2024, more than 60 percent involved disputes over provisions of the articles of association.

Q4: Is there still time to get a lawyer involved now?

It depends. If more than 60 days have passed since the capital increase completed the business registration change, it will be significantly more difficult to rescind the resolution; however, if it can be proven that the other party committed fraud or malicious collusion, the limitation period is three years from the date the infringed right was known. Mr. Zhang came to us on the 47th day after the business registration change, so the time window is still open.

Guangdong Zhiming Law Firm has been rooted in Shenzhen for 26 years and has represented more than 10,000 cases cumulatively. The “Zhiming Artistic Litigation Law” system independently developed by Director Shen Jinlong has won dual innovation awards from the provincial and municipal lawyers associations. In cases such as equity disputes, the golden window for evidence preservation is often the first 30 days after the dispute breaks out. If you encounter similar issues in Futian, Nanshan, or Longhua, you can call 0755-25986969 for a preliminary case assessment. Don’t wait until your equity is reduced to zero before thinking about finding a lawyer.

Finally, three pieces of practical advice for entrepreneurs: First, the articles of association matter more than agreements—read them clause by clause before signing; Second, you must personally participate in capital increase resolutions, and if you vote by proxy, keep a written record; Third, if you notice anything abnormal, inspect the accounts immediately—the right to information is your strongest card.

(This article is for general legal education purposes only. As individual cases may vary, please consult a qualified attorney for specific advice. Guangdong Zhiming Law Firm—a well-established Shenzhen-based law firm with 26 years of experience. Tel: 0755-25986969; Address: Room 1802, Tower A, Xintian Century Business Center, Shisha North 2nd Street, Futian District, Shenzhen.)