Executive Summary: Key Legal and Evidentiary Issues

• Leean International Corp., an approximately 9.3% shareholder of CF Energy Corp., sought derivative leave under ss. 232(2) and 233(1) of British Columbia's Business Corporations Act to prosecute a claim to enforce a Loan Discharge Agreement involving approximately RMB 36,000,000 (about CA$6.8 million).

• CF Energy's board chose to litigate in China despite an exclusive jurisdiction clause requiring all proceedings to be brought in Ontario courts, and Chinese courts repeatedly declined jurisdiction over the dispute.

• Two of CF Energy's five directors were beneficiaries of the Estate of the late founder Huajun Lin, raising concerns about potential conflicts of interest in the board's decision not to pursue the Ontario claim.

• The 2022 Ontario Statement of Claim was never served within the required six-month period, necessitating an extension of time under Ontario's Rules of Civil Procedure before the action could proceed.

• CF Energy's evidence of business judgment was found to be vague, lacking board minutes or details on whether legal advice was followed, and did not establish a solid basis for the business judgment rule.

• Allegations of Leean's ulterior motives based on a shared address between Leean and a dissident shareholder's director were deemed too tenuous and speculative to displace prima facie evidence of good faith.

The Loan Discharge Agreement and the founding dispute

CF Energy Corp. is a public company incorporated in British Columbia, traded on the TSX Venture Exchange, and operating as an integrated energy provider and natural gas distribution company in China. In May 2017, when the company was still known as Changfeng Energy Inc., it entered into a "Loan Discharge Agreement" with its founder, chairman, CEO, and president, Huajun Lin. Under this agreement, CF Energy would cause its wholly owned subsidiary, Sanya Changfeng Offshore Natural Gas Supply Co., to pay Mr. Lin RMB 36,000,000 in exchange for the discharge of outstanding loans owed to him. A critical provision stipulated that if CF Energy had not completed a listing on the Hong Kong Stock Exchange by June 28, 2019, the company would have the right to require Mr. Lin to subscribe for common shares at a value equivalent to RMB 36,000,000 at a price equal to the volume weighted average trading price of the common shares in the 30 calendar days preceding June 28, 2019. The agreement was governed by Ontario law and contained an exclusive jurisdiction clause requiring all proceedings to be brought in the courts of the Province of Ontario.

Mr. Lin's passing and the Estate's refusal to comply

On January 30, 2019, CF Energy announced it was deferring its Hong Kong Stock Exchange initial public offering. Mr. Lin resigned from his positions in February 2019 and passed away on March 1, 2019, in China. The beneficiaries of Mr. Lin's estate — his widow Mingfei He, and his children Ann Siyin Lin, Siqin Lin, and Zhipei Lin — continued to control substantial shares of CF Energy, with Ann Siyin succeeding him as CEO and Chair and continuing to hold those positions. She and Siqin Lin also served as directors. On September 5, 2019, CF Energy delivered a Notice of Exercise to the beneficiaries requiring the Estate to subscribe for shares pursuant to the Loan Discharge Agreement. The beneficiaries responded with varying positions: Mingfei He asserted that the rights and obligations of the Loan Discharge Agreement were dismissed with the death of Mr. Lin; Zhipei Lin acknowledged the rights and obligations under the agreement but refused to consent to the Estate honouring those obligations; and Ann Siyin and Siqin Lin advised that they consented to the Estate honouring the Loan Discharge Agreement. The Estate ultimately did not purchase the required shares.

Litigation in China and the Ontario proceedings

CF Energy's board decided to pursue enforcement in China rather than Ontario, citing factors such as the location of the Estate beneficiaries and assets in China, the cost and complexity of serving a claim in the Ontario Superior Court of Justice against the Estate beneficiaries in China, and the enforceability of foreign judgments in China. On June 21, 2021, CF Energy filed a contract dispute case in the Sanya Intermediate People's Court, notwithstanding the choice of forum provisions in the Loan Discharge Agreement. On August 30, 2021, just over two months later, CF Energy also filed a Statement of Claim against the Estate in the Ontario Superior Court of Justice (the "2021 Ontario Action") but deliberately chose not to serve it. The Sanya Intermediate People's Court declined to take jurisdiction over the dispute. On February 17, 2022, CF Energy discontinued the 2021 Ontario Action and filed an identical Statement of Claim that same day (the "2022 Ontario Action"), again deliberately choosing not to serve it. The six-month deadline for service under the Ontario Rules of Court expired on August 17, 2022. CF Energy appealed the Chinese jurisdictional ruling to the Hainan Provincial High People's Court, which dismissed the appeal on September 5, 2022. CF Energy then applied for a new trial in the Sanya Intermediate People's Court on the basis of new evidence, but that application was rejected on February 24, 2023. On October 30, 2023, CF Energy filed another contract dispute case in the Sanya Suburban People's Court, which was dismissed on December 7, 2023. By April 26, 2024, CF Energy issued a media release indicating it was exploring its options and that if no reasonable options were available, it would cease to pursue enforcement of the Loan Discharge Agreement.

Key clauses at issue

The Loan Discharge Agreement contained two pivotal clauses. Section 2 established the "Right" allowing CF Energy, if the Hong Kong listing was not completed by June 28, 2019, to require Mr. Lin (or his estate) to subscribe for common shares at the Canadian dollar equivalent of RMB 36,000,000. Sections 11 and 12 provided that the agreement was governed by the laws of the Province of Ontario and that the parties irrevocably and unconditionally submitted to the exclusive jurisdiction of the courts of the Province of Ontario, waiving any defence of inconvenient forum or immunity from jurisdiction. CF Energy's decision to litigate in China directly contravened these forum selection provisions, a point the court found significant.

Leean's petition for derivative leave

Leean International Corp., holding approximately 9.3% of CF Energy's common shares, had been pressing CF Energy since April 2023 to pursue the Ontario claim, repeatedly raising concerns about the company's failure to act. CF Energy responded with limited and cautious replies, asserting that it was "actively pursuing" enforcement and that its board of directors, in exercising its business judgment after receiving advice from legal advisors, had determined that pursuing the claim in China was in CF Energy's interests. When CF Energy's April 26, 2024 media release revealed it might cease pursuing enforcement, Leean commenced proceedings on June 6, 2024, seeking leave under the Business Corporations Act to prosecute the 2022 Ontario Action on CF Energy's behalf. Leean argued the claim was viable and substantial — the RMB 36,000,000 amount was equivalent to 22% of CF Energy's gross profit and 9% of CF Energy's total assets for the 2018 year — and that CF Energy's share performance and key financial parameters had fallen since 2018, including a 75% drop in share price, a 99% drop in earnings per share, a 28% drop in gross profit, a 108% drop in profit, and the cessation of dividend distribution.

The court's analysis of good faith and best interests

Justice Veenstra found that Leean met the good faith requirement. Mr. Gao, a director of Leean, had provided evidence — which was not subject to any request for cross-examination — of his belief in the merits of the claim, and Leean's correspondence from April 2023 to May 2024 demonstrated a genuine effort to encourage CF Energy to act. CF Energy's allegation of ulterior motives — based on a shared address between Leean's registered office and a person connected to a 2020 dissident shareholder proxy contest — was found to be "so tenuous and speculative" that it did not form a foundation for any inference of an ulterior motive and did not give rise to any obligation on Leean to respond. On the question of best interests, the court found the claim appeared to be a contractual claim supported by documentary evidence, the benefits of which were significant in the context of CF Energy's business. The court found the evidence tendered by CF Energy with respect to the alleged exercise of its business judgment to be subject to the same sort of vagueness concerns identified in Eastern Platinum, noting it consisted of a list of relatively generic factors said to have been taken into account by the board, a reference to having obtained legal advice, with no board minutes and no indication whether the board reconsidered its approach after the Chinese courts repeatedly refused to take jurisdiction. The court also observed that two of the company's five directors were Estate beneficiaries — noting that nearly half of the directors of the company were de facto defendants to the claim — and stated it was not clear that the fact those directors had indicated their consent to the Estate honouring the Loan Discharge Agreement left them with no financial interest in the outcome.

Extension of time and enforceability considerations

A central issue was whether an Ontario court would grant an extension of time to serve the 2022 Statement of Claim. CF Energy relied on Ontario cases such as Pagliuso and Gupta, holding that deliberate decisions not to serve claims are fatal to extension requests. Justice Veenstra distinguished those cases, noting they involved individuals advancing personal claims, whereas the circumstances of the present case were substantially different — involving a claim sought to be pursued by way of derivative leave, brought by a company against its primary shareholder, in circumstances in which nearly half of the directors were de facto defendants, and in which there was no reasoned explanation given as to the decision not to pursue the claim in the forum the parties had agreed would have exclusive jurisdiction. The court accepted Leean's submission that due to the lack of detailed information provided by CF Energy before late April 2024, there was no reasonable opportunity for Leean to properly prepare an application for derivative leave prior to that point, and that Leean moved quickly from that point to commence the proceeding on June 6, 2024. The court anticipated that an Ontario court would be troubled by the connections between the board and the Estate, and found there was a reasonable prospect that Leean would succeed on an application to extend the time to serve the Statement of Claim. The court also noted it struggled to see much concern with enforceability of any judgment given that the subject matter of the claim was an interest in a Canadian company.

The ruling and outcome

The Honourable Mr. Justice Veenstra granted Leean derivative leave pursuant to s. 232(2) of the Business Corporations Act to prosecute the claim in the 2022 Ontario Action in the name and on behalf of CF Energy against the Estate of Huajun Lin. The court declined to order the posting of cash security for costs at this stage but granted CF Energy liberty to apply for such security once the application for leave to extend the time to serve the Ontario Statement of Claim has been decided. Leean was entitled to its costs of the petition, though payment of those costs was delayed pending the outcome of the Ontario extension application and, if CF Energy applies for security for costs, until that application has been decided. The Statement of Claim in the 2022 Ontario Action seeks a declaration that the Estate is obligated to subscribe for common shares and an order directing the Estate to complete the subscription, or alternatively, damages in the amount of $6,861,587, plus prejudgment interest, post-judgment interest, and costs; however, no final determination of the total recoverable amount was made at this stage.