[Direct answer]There is no standard answer to the distribution of equity. The proportion is usually determined based on the total investment amount, job responsibilities, resource contributions, and risk-bearing capacity. The default legal rule is that voting rights in the shareholders' meeting are exercised in proportion to the investment amount, and post-tax profits are distributed in proportion to the actual investment amount. However, the company's articles of association and shareholders' agreements may stipulate otherwise (Articles 65 and 210 of the Company Law of the People's Republic of China, amended on December 29, 2023, and implemented on July 1, 2024). A reasonable approach is to avoid an equal 50-50 split, reserve an option pool, and stipulate in writing the maturity of equity and the exit repurchase mechanism. When transferring investments, it is necessary to specify the purpose of the transfer and retain the relevant documents. Writing the rules into a shareholders' agreement before cooperation is the most cost-effective way to prevent disputes. For more details, please refer to the following link:Business and commercial servicesAndBeijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 65 of the Company Law of the People's Republic of China (amended on December 29, 2023, and implemented on July 1, 2024)

The shareholders' meeting is conducted by shareholders exercising their voting rights in proportion to their investment, unless otherwise provided in the company's articles of association. This means that "the one with more money has the final say" is just a default rule. Partners can completely stipulate different voting rights for the same shares through the articles of association: partners who invest less but are fully engaged in the business can obtain more voting rights, while pure investors can only retain the right to profits and transfer the right to governance. The freedom to negotiate the articles of association is the main battlefield of equity negotiations. After the proportion is determined, it must be reflected in the articles of association and the shareholders' agreement simultaneously.

2. Article 210 of the Company Law of the People's Republic of China (amended on December 29, 2023, and implemented on July 1, 2024)

After the company compensates for losses and withdraws the statutory reserve fund, the post-tax profit of the limited liability company shall be distributed according to the proportion of the actual paid-in capital of the shareholders, unless all shareholders agree otherwise. Note two points: First, the dividend is implicitly linked to the "actual paid-in capital" rather than the subscribed capital. Shareholders who have not paid the subscribed capital will not receive dividends according to the default rules. Second, if you want to distribute money according to contributions, you must specify it in the articles of association or the agreement of all shareholders. Oral agreements are not valid. Writing clear rules for profit distribution in advance can avoid the first internal conflict in the company after making profits.

3. The interpretation of the case by the arbitrator

The court highly respects the autonomous arrangements of the articles of association and shareholder agreements, and the disputes over proportions are generally determined according to the written documents. It's extremely difficult to prove the existence of "dry shares" and "oral agreements that each party will hold a 50% stake" in litigation. The first triggering factor of partnership disputes is the lack of an exit mechanism: what price should be paid for a mid-term exit, and how to recover unripe equity rights? If these issues are not addressed in advance, disputes are inevitable afterwards. Evidence of investment also determines the outcome of the litigation. Transfer receipts, usage notes, shareholder registers, and shareholders' meeting confirmation documents must corroborate each other in order to prove that the investment obligations have been fulfilled in litigation.

II. Henglue Lawyer's Real Cases (Detailed Review)

Review of the case:On March 8, 2017, Zhao * signed an "Investment Partnership Agreement" with B Education Company, agreeing to open an offline flagship campus. Zhao * invested 320,000 yuan (of which 8,000 yuan was included in the registered capital and 312,000 yuan was included in the capital reserve), which was managed by B Company's special account. After Zhao * transferred the money, Mu * invested 500,000 yuan and Li * invested 100,000 yuan. The campus was renovated and operated, but no new company was established. On November 14, 2017, B Company signed an "Agreement" with Zhao *, A Company, Mu *, and Li *, involving a brand change, B Company's withdrawal, and A Company's acquisition of rights and interests. On the same day, Zhao * and A Company signed a "Shareholders' Agreement", agreeing that the equity ratio of the new company would be 77% for A Company, 12.5% for Mu *, 8% for Zhao *, and 2.5% for Li *, with A Company responsible for registration and operation. However, although the campus continued to operate, the new company was never established, and Zhao *'s contractual purpose was frustrated. Therefore, he entrusted Beijing Henglu Law Firm to handle the case.Xue Suhua、Wang DongThe lawyer filed a lawsuit.

The focus of the controversy:Firstly, the new company has never been established. Can Zhao * terminate the Shareholders' Agreement? Secondly, has Zhao * fulfilled his obligation to make capital contributions? Thirdly, should B Company, as a sole limited liability company, bear joint and several liability?

Our position and that of the other party are as follows:Zhao * sued to rescind the "Shareholder Agreement" and requested that Company A return the investment of 320,000 yuan; both Company A and Company B agreed to rescind the agreement but refused to refund the money, arguing that Zhao * had not paid any investment to the agreement and that Company B was not a party to the agreement.

Attorney's Strategy and Legal Opinion:Attorneys Xue Suhua and Wang Dong argued that all the agreements were genuine expressions of intent and legally valid; combined with the agreements and the details of the creditor-debtor relationship in another case, it can be proven that Zhao * and others have fulfilled their obligation to contribute capital; after signing the agreements, A and B Companies never established a new company, Zhao * never participated in the operation, and the contractual rights were never realized. A Company constituted a fundamental breach of contract, and Zhao * exercising the right of rescission is legally justified; B Company is a sole-shareholder limited liability company of A Company. If it cannot prove that its property is independent of the shareholders, it shall bear joint and several liability for the return of the contributed capital.

The court's reasoning and the outcome of the case:The court adopted the main opinions of lawyers Xue Suhua and Wang Dong, and ruled that the "Shareholders' Agreement" signed by Zhao * with A Company, Mu * and Li * was terminated on August 15, 2023, and A Company should return the investment amount of 320,000 yuan to Zhao * within ten days. The lesson for partners in this case is straightforward: no matter how well the equity ratio is written, if the company's establishment, the implementation of the articles of association, and the exit arrangements are not implemented, the investment will face the risk of being wasted. Written agreements and investment certificates are the last safety net.

This case is handled by Beijing Henglu Law Firm.Xue SuhuaAttorney (Practice Certificate No.: 11101201211769926, subject to the certificate issued by the judicial administrative organ)Wang DongAttorney (practice certificate number: 11101201910090334, subject to the certificate issued by the judicial administrative organ) acting on behalf of the client.

III. Frequently Asked Questions

Q1: What are the problems with an equity structure where each party holds a 50% stake?

The equal shareholding structure lacks a clear decision-making core, and the company may be paralyzed when shareholders are deadlocked; there is also no dominant party to promote repurchases when one party wants to exit. Practical advice is to ensure that at least one party holds more than half or even two-thirds of the shares, and to complement it with bylaws stipulating voting rules for major matters to avoid the governance deadlock of "everyone having the final say but no one actually making a decision", and also to leave room for adjustment in subsequent financing.

Q2: How should equity be distributed among technical partners who only contribute effort but not money?

A common practice is to grant restricted equity or options: first, the proportion is determined based on contributions, then a maturity period of about four years is agreed upon, and the ownership is gradually vested on an annual or milestone basis. If a partner withdraws before the maturity period, the unvested portion will be repurchased by the company or other shareholders at an agreed price. For pure cash partners, it is necessary to require that the investment be fully paid in, with equal rights and responsibilities, to avoid disputes arising from "taking shares for free without assuming responsibilities" in the future.

Q3: When there is a conflict between the shareholders' agreement and the company's articles of association, who should be prioritized?

The two documents serve different purposes: the articles of association have the effect of registration and publicity, and matters such as voting, dividends, and capital increases shall be governed by the articles of association; the shareholders' agreement binds the rights and obligations between the signing shareholders, and the breach of contract liability shall be claimed according to the agreement. It is prudent to ensure that the two documents are consistent in terms; if there are indeed differences, the agreement should clearly specify the rules for handling conflicts to prevent parties from being at a loss when each insists on their own viewpoint.

Q4: If a partner withdraws from the partnership midway, how should the equity be handled?

If there is an agreement in advance, the repurchase or transfer shall be carried out in accordance with the agreement; if there is no agreement, the exiting shareholder will still hold the equity, and the corporate governance may face a stalemate. It is recommended that the articles of association or the shareholder agreement set forth mandatory exit clauses: agree on the repurchase price formula (such as a discount based on net assets or financing valuation), the payment period and the non-competition clause. When exiting, the provisions can be implemented in accordance with the agreement, without the need for litigation.

Q5: What should I pay attention to when transferring the investment funds?

Transfer the funds from your personal account to the company's public account, with the memo "investment funds" or "capital contribution", and keep the bank receipt. After the capital contribution, require the company to issue a receipt of payment or record it in the shareholder register. The fact of the capital contribution was recognized by the court precisely because it was corroborated by the agreement and the detailed list of creditor's rights and obligations. However, a single private transfer without a memo has very weak probative force in litigation.

IV. Suggestions for Protecting Rights and Interests

  • Before starting a business, it's important to discuss exit mechanisms, such as buyback clauses, maturity of equity, and non-compete agreements, which should be included in the shareholders' agreement. After that, the business registration process can be initiated.
  • Avoid a 50-50 split or a "one-third each for three people" arrangement, and ensure that at least one party holds a stake large enough to dominate decision-making.
  • Make good use of the "one share, one vote" in the articles of association to ensure that investment, responsibilities, and decision-making power are aligned, rather than simply ranking them according to the amount of investment.
  • Invest the funds through the corporate account and specify the purpose of the investment. Prepare written shareholders' meeting documents for major resolutions, and establish a complete chain of evidence from day one.

If you are currently facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the relevant evidence materials, to avoid missing the statutory time limits. →Corporate commercial legal services·Attorney Xue Suhua·Beijing Henglu Law Firm