The Key Points of Equity Ratio
Author | Attorney Wang Hongting
When the company encounters matters requiring a decision during its operations, it must convene a shareholders’ meeting, at which the shareholders vote to determine whether to approve the agenda items. At shareholders’ meetings, each shareholder exercises voting rights in proportion to its capital contribution (unless otherwise provided in the company’s articles of association). The size of a shareholder’s equity interest directly affects its influence and control over the company and also serves as an important basis for determining the dividend distribution ratio. For this reason, the equity stake is particularly important to shareholders.
67%, 51%, 34%, 30%, 10%, 5%, 3%, and 1% are commonly referred to as the “eight lifelines” of equity. 67% represents the absolute control threshold; 51% is the relative control threshold; 34% is the safe‑guarding threshold, granting a veto power over major matters; 30% is the threshold for a mandatory tender offer on listed companies; 10% grants the right to convene an extraordinary general meeting; 5% serves as the warning threshold for significant equity changes in listed companies; 3% entitles shareholders to inspect accounting records; and 1% confers the rights to submit temporary proposals and bring derivative lawsuits.
This article primarily examines the impact of equity/stock ownership percentages in limited liability companies and joint-stock companies on shareholders’ rights.
[Note: The new Company Law of 2024 will come into effect on July 1, 2024; all statutory references in this article are to the 2024 New Company Law.]
Equity lifeline
01
67% absolute control vs. 34% veto power
When the shareholders’ meeting makes a resolution to amend the company’s articles of association, increase or reduce the registered capital, or adopt any other material resolution concerning the merger, division, dissolution, or change of the company’s legal form, such resolution shall be approved by shareholders representing more than two-thirds of the voting rights in a limited liability company; in a joint-stock company, it shall be approved by shareholders present at the meeting who hold more than two-thirds of the voting rights.
A 67% equity stake means the shareholder represents more than two-thirds of the voting rights.
The Company Law does not explicitly stipulate a veto right for a 34% equity stake; rather, this threshold is relative to the requirement of more than two-thirds of the voting rights. If the voting rights needed to block a material matter amount to one-third or more, then the requisite majority for approving such matters cannot be achieved. For this reason, this 34% equity threshold is referred to as the “one-vote veto line” for material matters.
Legal Basis: Articles 66 and 116 of the Company Law
02
51% relative controlling interest
In addition to the major corporate decisions mentioned above, resolutions of the shareholders’ meeting on other matters shall be adopted by a company limited by shares if approved by shareholders representing more than half of the voting rights; for a joint-stock company, such resolutions shall be adopted by shareholders present at the meeting who hold more than half of the voting rights.
Legal Basis: Articles 66 and 116 of the Company Law
03
10% temporary meeting rights
Shareholders’ meetings are divided into regular meetings and ad hoc meetings.
To be precise, “10%” refers to shareholders holding more than one-tenth of the voting rights. Although such shareholders typically have limited influence on decision-making at shareholders’ meetings, if they believe that a special shareholders’ meeting should be convened, the company shall convene such a meeting when requested by shareholders in a limited liability company who hold more than one-tenth of the voting rights, or by shareholders in a joint-stock company who individually or collectively hold more than 10% of the company’s shares.
The shareholders’ meeting shall be convened by the board of directors and chaired by the chairman. If neither the board of directors nor the supervisory board convenes or chairs the shareholders’ meeting, shareholders of a limited liability company who collectively hold more than one-tenth of the voting rights may convene and chair the meeting themselves; in a joint-stock company, shareholders who, individually or collectively, have held ten percent or more of the company’s shares for ninety consecutive days or longer may likewise convene and chair the meeting themselves.
Statutory Basis: Articles 62, 63, 113, and 114 of the Company Law.
04
3% right to inspect accounting books
Limited Liability Company: Shareholders have the right to inspect and copy the company’s articles of association, the register of shareholders, minutes of shareholders’ meetings, resolutions of the board of directors, resolutions of the supervisory board, and financial accounting reports. They may also request to inspect the company’s accounting books and accounting vouchers.
Joint-stock company: Shareholders have the right to inspect and copy the company’s articles of association, the register of shareholders, minutes of shareholders’ meetings, resolutions of the board of directors, resolutions of the supervisory board, and financial accounting reports, and may submit proposals or raise inquiries regarding the company’s operations. If a shareholder, either individually or collectively, has continuously held more than three percent of the company’s shares for a period of at least one hundred and eighty days and requests to inspect the company’s accounting books and vouchers, the provisions applicable to limited liability companies shall apply. If the company’s articles of association prescribe a lower shareholding threshold, such lower threshold shall prevail.
Legal Basis: Article 57 and Article 110 of the Company Law
05
1% temporary proposal and the right to bring a derivative suit
The right to propose temporary motions applies to shareholders of a joint-stock company: any shareholder, individually or collectively holding more than one percent of the company’s shares, may submit a written proposal for a temporary motion to the board of directors no later than ten days prior to the date of the shareholders’ meeting.
The right to bring a derivative suit refers to the following: if the directors, supervisors, or senior management of a company, or those of its wholly owned subsidiary, violate laws, regulations, or the provisions of the company’s articles of association in the course of their duties and thereby cause losses to the company, shareholders of a limited liability company, or shareholders of a joint-stock company who have individually or collectively held more than one percent of the company’s shares for at least 180 consecutive days, may submit a written request to the board of supervisors or the board of directors to file a lawsuit with the people’s court. If the board of supervisors or the board of directors refuses to bring such a suit, or if the circumstances are urgent, a shareholder holding one percent of the shares may, in their own name, directly file a lawsuit with the people’s court.
Statutory Basis: Articles 115 and 189 of the Company Law
Interpreting the law through cases
The following cases are presented to further illustrate the impact of equity ownership percentages on shareholders’ exercise of their rights:
Keyword：With a 70% equity stake, the resolution to dissolve the company was approved by vote and is valid.
Case Summary：The defendant company was established in August 2013 with a registered capital of RMB 2 million. Plaintiff Zhang holds a 40% equity interest, while third parties Liu and Jia each hold a 30% equity interest. The company’s term of operation is from August 7, 2013, to August 6, 2023.
On September 5, 2023, the plaintiff, Zhang, notified the two third parties via text message that a temporary shareholders’ meeting of a certain company would be held at 10:00 a.m. on September 23, 2023, to deliberate on the dissolution of the company and to elect and establish a liquidation committee. On the same day, the plaintiff mailed the notice to the two third parties via EMS, and the two third parties signed for the notice the following day.
On September 23, 2023, the defendant company convened an extraordinary shareholders’ meeting, which was attended by the plaintiff and third party Jia. The resolution to dissolve the company was adopted by vote. Third party Liu did not consent to the liquidation and dissolution of the company, arguing that the resolution is invalid. Therefore, the plaintiff, Zhang, brought a lawsuit to the court seeking a determination of the validity of the agreement.
The court holds that the plaintiff, Zhang, as a shareholder of the defendant company holding a 40% stake and its registered legal representative, is entitled to convene a shareholders’ meeting to address the issue of the company’s dissolution. The shareholders’ meeting was scheduled to be attended by three shareholders, but only two shareholders were present, representing 70% of the total shares. The convening of the meeting, the voting procedures, and the content of the shareholders’ resolution ultimately adopted all comply with the provisions of corporate law and the company’s articles of association; therefore, the shareholders’ resolution is hereby confirmed as valid in accordance with the law.
In the case at hand, the dissolution of the company constitutes a significant decision and, pursuant to the provisions of the current Company Law, must be approved by shareholders representing more than two-thirds of the voting rights. In addition to ensuring that the voting rights meet the statutory requirements, the procedures for convening the meeting must also be lawful. Prior to the meeting, notices must be duly served on all shareholders, and the proceedings must be properly notarized to prevent the shareholders’ meeting from being invalidated due to procedural defects.
Avoid extreme equity structures.
1. Avoid splitting equity 50/50.
The equity structure is unclear, and execution capabilities are weak. Decisions at shareholders’ meetings shall be approved by a vote of shareholders representing at least more than half of the total number of shares. When a company has only two shareholders, each holding a 50% equity interest, the most common issue is that disagreements in decision-making can easily arise, leading to gridlock at shareholders’ meetings and preventing the company from implementing decisions swiftly and effectively, thereby disrupting its normal operations.
If the shareholders’ meeting mechanism remains dysfunctional for an extended period, it may ultimately lead to the dissolution of the company.
2. Avoid a situation where one shareholder holds 100% of the shares.
This refers to a situation where a single shareholder holds 100% of the company’s equity. In this scenario, the shareholder has complete control over the company, can make decisions on all matters and management initiatives, and enjoys all the profits. It is advantageous for shareholders. However, the risks are also quite evident: a 100% equity structure restricts the company’s access to funding and is detrimental to its operations.
More importantly, a sole shareholder bears heavier liability for debts and faces greater risks. If a company is unable to repay its debts, and it is a single-shareholder company in which the shareholder fails to prove that the company’s assets are separate from the shareholder’s own assets, the shareholder shall be jointly and severally liable for the company’s debts.
3. Avoid highly dispersed equity ownership.
In situations where the equity structure is highly dispersed and no single shareholder holds more than 30% of the shares, the company lacks a clear controlling shareholder and an actual controller. This situation may lead to an unstable corporate governance structure and inefficient decision-making, which could pose significant risks to the company’s operations and production.
lawyer Introduction
Attorney Wang Hongting
Special Contributing Writer for the Shenzhen Lawyers Association
Full-time lawyer at
Secretary-General of the Family Law Department, Zhiheng Center for Matrimonial, Family Matters, and Wealth Succession Law
Member of the Zhiheng Company Legal Affairs Center
Professional field:
Marital wealth, corporate governance
Civil and commercial disputes, labor disputes,
Infringement, bankruptcy liquidation
Swipe up to view past issues.
Zhiheng Legal Education
Zhiheng Legal Education | Can property be divided without getting a divorce?
Zhiheng Legal Education | Is It Equity Transfer or Debt Rights?
Zhiheng Legal Education | Drones Are Not Freely Flyable at Will
Zhiheng Legal Education | Circumstances in Which the Losing Party Bears the Attorney’s Fees
Zhiheng Legal Education | Property Management Relations: Don’t Let Owners’ Rights Become a Fig Leaf
Zhiheng Legal Education | The Issue of Withdrawal from a Partnership Agreement
Zhiheng Legal Education | Practical Guide to Corporate Bankruptcy Applications
Zhiheng Legal Education | Three Key Legal Considerations in Wealth Management for Blended Families
Zhiheng Legal Education | Telecommunications Fraud Insurance – Claim Denied?
Zhiheng Legal Education | After divorce, can one disavow the divorce agreement?
Zhiheng Legal Education | Understanding and Application of the Comprehensive Working Hour System
Zhiheng Legal Education | A Brief Discussion on How to Prevent Trademark Genericization
Zhiheng Analyzes the Law
Zhiheng Legal Analysis | Defense Arguments in Cases of Intentional Injury
Zhiheng Analysis | An Examination of the Comparison Issues in Prior Art Defenses
Zhiheng Analysis | Determination of Prior Art in a Patent Non-Infringement Defense
Zhiheng Legal Analysis | An Examination of Key Defense Points in Fraud Cases
Zhiheng Analyzes the Law | Discussion on Legal Practice Issues Related to Debt Assumption (I)
Zhiheng Analysis | Justice and Compromise in Criminal Defense
Zhiheng Analysis | Defenses Available to Defendants in Online Copyright Cases
Zhiheng Analysis | Conflicts and Coordination of the “Estoppel Principle” in Patent Law
Zhiheng Analysis | Current Legislative Status and Trends in the Protection of Trade Secrets
Zhiheng Analysis | Judicial Remedies for the Change of a Nominal Legal Representative
Zhiheng Clarifies Doubts
Zhiheng Clarifies | Will the court adopt the sentencing recommendation issued by the procuratorate?
Zhiheng Clarifies | The crucial sixty-day period for accepting a bequest—what’s the key?
Zhiheng Clarifies | Growth Experiences After Six Months of Practice
Zhiheng Clarifies | Is the prenuptial agreement you signed valid?
Zhiheng Clarifies | Reflections Three Months After the Group’s Formation
Zhiheng Clarifies | The Disruptor—The Cross-Industry Lawyer: The Path from Novice to Expert
Zhiheng Clarifies | The Metamorphosis from Rookie to Expert
Zhiheng Clarifies | Right of Residence—A Haven for Debtors Seeking to Evade Mortgage-Related Claims?
Zhiheng Clarifies | Strategies for Expanding Case Sources and the Essence of Communication
Zhiheng Clarifies | Several Issues Regarding Lawyers’ Individual Income Tax Annual Settlement
Featured Case
Featured Case | Practice Notes on a Labor Dispute Case
Judicial Interpretation
Typical Case
Laws and Regulations
Laws and Regulations | Administrative Reconsideration Law of the People's Republic of China
This document and its contents are shared by
for informational purposes only and do not constitute legal opinions, advice, or a basis for decision-making by the firm or its attorneys. If you require legal advice or a professional legal analysis, please contact the specialized attorneys at
, or send us a private message on our WeChat official account and leave your contact information. If you wish to reprint this article, please contact the official account editor via the backend.
Zhiheng · Introduction