[Direct answer]The founder maintains control through a three-pronged approach: holding more than two-thirds of the voting rights and ensuring a majority stake; stipulating voting rights differences and entrusting voting rights in the articles of association in accordance with Article 65 of the Company Law; and supplementing with arrangements such as a concerted action agreement and board nomination rights to prevent the risks of financing dilution and equity substitution.

1. Problem background and typical scenarios

The distribution of equity is an unavoidable issue in the establishment and financing of a company. Typical risk scenarios include: partners equally distributing equity (such as 50:50 or 33:33:34), leading to decision-making deadlocks; founders' shareholdings being diluted to the point of losing control after multiple rounds of financing; investors taking substantial control of the company through repurchase rights, veto power, and anti-dilution clauses; and disputes over the disposal of equity after shareholders leave. Control disputes are often overlooked when the business is running smoothly, but they erupt when decisions diverge or capital enters the scene. At that point, the cost of remediation is extremely high, so it's necessary to design solutions in advance at the establishment and each round of financing stages.

II. Key points of contention

  • Can the investment ratio and voting rights be separated? Can the articles of association of a limited company stipulate that voting rights shall not be exercised in accordance with the investment ratio, and can differentiated voting arrangements be set up?
  • The hierarchy of the effectiveness of the shareholders' agreement and the company's articles of association: If the internal agreement arrangements are not included in the articles of association, can they bind the new shareholders and the company's organs?
  • The implicit dilution of financing terms: repurchase, put options, anti-dilution, and the long-term impact of board seat arrangements on founders' control rights.

III. Professional analysis by Henglue Law Firm

A dispute over an equity investment contract handled by Henglue Law Firm is worth learning from: In 2017, Zhao * invested 320,000 yuan to participate in a certain education project investment partnership. The parties signed a "Shareholder Agreement" stipulating the establishment of a new company, with the equity ratio being 77% for Company A, 12.5% for Mu *, 8% for Zhao *, and 2.5% for Li *. However, although the project was in operation, the new company was never established, and Zhao *'s shareholder rights were never implemented. Therefore, he entrusted Henglue Law Firm to handle the case.Xue SuhuaThe lawyer safeguarded the client's rights. The court confirmed the termination of the "Shareholders' Agreement" and ordered Company A to return the investment of 320,000 yuan within ten days. This case illustrates two points: Firstly, if the equity on paper is not registered through the company's establishment and bylaws, the rights may be reset at any time. Secondly, the exit and return mechanism for minority shareholders must be prearranged in the agreement. Similarly, when founders design control rights, the proportion, bylaws, and agreements must be interconnected. If any link is missing, there may be situations of "having equity but no control" or "having investment but no equity".

IV. Practical Suggestions and Legal Basis

In terms of legal basis, Article 65 of the current Company Law (amended on December 29, 2023 and implemented on July 1, 2024) stipulates that shareholders shall exercise their voting rights in proportion to their contributions at shareholders' meetings, unless otherwise provided for in the company's articles of association. This provides a direct basis for the design of voting rights differentiation in limited companies. Article 566 of the Civil Code, which governs the consequences of contract termination, applies to the return and liquidation of investments after the termination of investment agreements. Operational suggestions: formalize voting rights delegation, director nomination rights, and protective clauses in the articles of association; use limited partnership holding platforms to separate employee stock options from the voting rights of external shareholders; clarify resolution mechanisms for deadlocks and exit pricing mechanisms in shareholders' agreements; and promptly amend the articles of association and register them after each round of financing. For investment and financing structures, please refer to the relevant guidelines.Financial capital and cross-border transactions involving foreign entitiesFor services, daily equity and compliance management, you can refer to the following for more information.Intellectual property protection and corporate lawService.

5. Henglu Law Firm's Advice

There is no universal template for designing control rights. The key is to write down "who has the final say" in the articles of association and agreements, and then register it officially. This case is handled byXue SuhuaAttorney (practice license number: 11101201211769926, subject to the document issued by the judicial administrative organ) acting on behalf of the client. If you need support in equity structure and bylaws design, please feel free to consult us.Business and contract disputes in enterprisesService or accessBeijing Henglu Law Firm.

Q1: What percentage of shares must a founder hold to control the company?

In practical terms, holding more than two-thirds of the voting rights allows one to independently pass special resolutions such as amending the articles of association and increasing or decreasing the registered capital, thereby exercising absolute control; a majority vote can decide on ordinary matters; and holding more than one-third of the voting rights can veto special resolutions, forming passive control. However, these ratios are just a starting point: limited companies can arrange voting rights differences through their articles of association in accordance with Article 65 of the Company Law, and even with less than half of the shares, they can still lock in control; conversely, even with a high proportion but without supporting articles of association and agreements, they may still gradually lose control in multiple rounds of financing and governance disputes. When designing the structure, the ratios, articles of association, and agreements should be considered together and coordinated with each other.

Q2: Can the articles of association stipulate that voting rights shall not be exercised in accordance with the proportion of investment?

Yes. Article 65 of the current Company Law clearly stipulates that shareholders shall exercise their voting rights in proportion to their capital contributions at shareholders' meetings, unless otherwise provided for in the company's articles of association. Accordingly, limited liability companies may set up arrangements such as different voting rights for the same shares, voting according to the number of shareholders, or granting certain shareholders with weighted voting rights. It should be noted that such arrangements should be incorporated into the articles of association and registered for filing in accordance with legal procedures at the time of establishment or adjustment. If they only remain at the level of shareholders' agreements, their binding force on the company's organs and new shareholders will be reduced, and disputes over their validity are likely to arise.

Q3: What are the risks of equity holding on behalf of others to the control of the company?

There are mainly three types: First, the nominal holder may transfer or pledge the equity under his/her name without authorization, and a bona fide third party may acquire the rights according to law; Second, when the nominal holder is indebted, the equity under his/her name may be sealed up, frozen or even executed by the court; Third, if the actual investor requests to be named, he/she needs to obtain the consent of more than half of the other shareholders, which may lead to uncertainties. If it is necessary to hold shares on behalf of others, a strict holding agreement should be signed, and the equity pledge or an irrevocable voting rights authorization should be obtained. At the same time, the company and other shareholders should confirm the identity of the actual investor in writing, so as to reduce the risks through multiple measures.

Q4: What is the difference between a concerted action agreement and a voting rights proxy?

A concerted action agreement is an agreement between relevant shareholders to consult each other before exercising voting rights and to follow the opinions of the agreed parties when there are differences of opinion. It is essentially a contractual arrangement that relies on the continuous performance of all parties. If one party breaches the agreement, the situation may still get out of control. Voting rights delegation, on the other hand, is when shareholders directly authorize others to exercise their voting rights. This transfer of rights is more thorough and more transparent to the outside world. When aiming to stabilize control rights, a combination of voting rights delegation and protective clauses in the articles of association is usually more reliable. Regardless of which method is used, clear breach of contract liability should be set up, and it should be assessed whether to make irrevocable arrangements.

Q5: How to avoid dilution of control rights when raising funds?

First, plan the pace of equity release and issue shares in rounds based on valuation and capital needs to avoid releasing too much at once. Second, implement protective clauses in the articles of association regarding board seats, the appointment and dismissal of senior executives, and major matters to retain control of the business. Third, prudently assess the worst-case scenarios of provisions such as earn-out clauses, put-back clauses, anti-dilution clauses, and liquidation priority clauses, and set exercise caps and triggering conditions. Fourth, before signing the contract, ask a lawyer to provide a risk list of the provisions and quantify the impact of each clause on control rights before making a decision, rather than just focusing on the valuation.

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