LBM Energy Ltd v RM Corporation, 2023 ABKB 296

Court of King’s Bench of Alberta Citation: LBM Energy Ltd v RM Corporation, 2023 ABKB 296 Date: 20230516 Docket: 2201 04657 Registry: Calgary Between: LBM Energy Ltd Applicant - and - RM Corporation, Jianjun Cui, Yingchen Liu and Tao Li Respondents _______________________________________________________ Reasons for the Decision of the Honourable Justice D.A.

Labrenz _______________________________________________________ Introduction [ 1 ] The Applicant, LBM Energy Ltd. [“LBM”], a minority shareholder of Sunfluss Energy Corp [“Sunfluss”], seeks an order, which would prevent a current director Jianjun Cui from gaining control of the board, as LBM alleges that Mr. Cui has significant conflicts of interest and will breach his fiduciary duties to Sunfluss. [ 2 ] Mr. Cui is a shareholder of a foreign corporation, Yizhong Energy HK Limited [“Yizhong”] which is currently suing Sunfluss over an alleged default of a loan agreement.

RM Corporation, yet another shareholder in Sunfluss, sought a special shareholder meeting to remove a current director, Stephen “Binlin” Zhang, and to add Mr. Cui’s wife as a director, giving Mr. Cui, his wife, and his

daughter-in-law, 3 seats on a board of 5 members. [ 3 ] The Applicant raises the concern that Mr. Cui will employ effective control of the Sunfluss board to withdraw Sunfluss’ defence to the underlying Yizhong action, and to and discontinue Sunfluss’ counterclaim. Notably, at no time, either in written or oral argument, have the Respondents denied this intention. Facts [ 4 ] The significant factual disputes reside primarily in the merits of the underlying lawsuit as between Yizhong and Sunfluss.

Although not dispositive of this application, it is useful to briefly summarize the events that resulted in the Yizhong Action. The Yizhong Action [ 5 ] Mr. Zhang and Mr. Cui became acquainted via a mutual friend, Shuchun “Harry” Du in January 2018. Mr. Cui expressed some interest in acquiring oil and gas assets in Canada and was actively seeking to acquire producing properties. Mr. Cui incorporated Yizhong in Hong Kong on January 4, 2018, in conjunction with partners Jinmin Zhao and Xu Huilin. [ 6 ] Following the incorporation of Yizhong, three additional companies were incorporated in 2018.

Loyal Operating is the operating entity designated to acquire the producing oil and gas assets. Sunfluss was incorporated to hold the interests of LBM and Greenwald Consulting Ltd. in Loyal Operating, as the holding companies of Mr. Zhang and Mr. Du respectively. Yizhong also incorporated an Alberta subsidiary Loyal Energy (Canada) Holding Ltd. which would own the Yizhong interest in Loyal Operating. [ 7 ] To finance this venture, Mr. Zhang and Mr. Du invested $1,000,000 in Sunfluss. They also borrowed $1,291,250.00 from Yizhong to finance the purchase of Sunfluss’ interest in Loyal Operating.

The Yizhong Loan is at the core of the dispute that precipitated the underlying action. Mr. Zhang claims that he was unaware when negotiating the Yizhong Loan that Mr. Cui, utilizing a holding company, was a director and material shareholder of Yizhong, but this is not integral to the present application. [ 8 ] Sunfluss owns 15% of Loyal Operating. Loyal Holding own the remaining 85%.

Loyal Holding itself is wholly owned by Yizhong. [ 9 ] There is a considerable disparity by way of factual disputes as between the parties regarding what was, and was not, initially agreed to in relation to the terms of the loan contract. Of note and forming part of the dispute between the parties in relation to the underlying Yizhong action is the demand clause. This clause permits Yizhong to demand repayment of the loan within 14 days. Following a breakdown in the business relationship between Mr. Zhang and Mr. Cui, the circumstances of which are also heavily disputed, Yizhong demanded repayment of the loan.

Ultimately, Sunfluss defaulted in response to the demand following unsuccessful negotiations. Mr. Cui during the relevant period occupied a position as a director on the boards of both Sunfluss and Yizhong. [ 10 ] Following the alleged default, Yizhong sued Sunfluss for breach of contract and for repayment of the loan. Particularly, Yizhong seeks to transfer Sunfluss’ interest to Yizhong.

This has resulted in further disputes as between the parties concerning the proper valuation of Sunfluss; Sunfluss claiming that its value greatly exceeds the value of the loan. [ 11 ] Sunfluss’ counterclaim alleges that the demand clause was not part of the contract. It is important to note that Mr. Cui voted to initiate the demand clause to the detriment of Sunfluss and to commence the litigation against Sunfluss in his capacity as a director of Yizhong. At the same time, as a director of Sunfluss, Mr. Cui voted in favour of not defending the Yizhong action or pursuing the counterclaim.

The Present Application [ 12 ] Following the events described above, a dispute has arisen as to whether RM Corp is a majority shareholder, effectively providing Mr. Cui with the votes necessary to take control of Sunfluss’ board. RM Corp has actively sought a special shareholder meeting with a view to replacing Mr. Zhang with Mr. Cui’s wife, Tao Li. Tao Li’s presence on the board, along with Mr. Cui’s daughter- in-law, would effectively give Mr. Cui control over 3 of the 5 seats. [ 13 ] The concern raised, as earlier noted, is that Mr.

Cui would obtain the controlling votes necessary to discontinue the defence of Sunfluss and to withdraw its counterclaim. Notably, the Respondents have not denied that this is their intention in either oral or written argument. [ 14 ] The Applicant applies under s. 248 of the Alberta Business Corporations Act , RSA 2000, c B-9 [“ ABCA ”] seeking an order to restrain Mr. Cui and his nominees themselves from voting on or participating in matters of the board that involve the underlying Yizhong action, with respect to Sunfluss’ responding defence and counterclaim. In other words, an order that Mr.

Cui and his nominees recuse themselves. The Applicant argues that this remedy is appropriate because Mr. Cui has violated both the corporation’s bylaws and the ABCA by failing to inform the board of his conflict of interest resulting from his position on the boards of Yizhong and of Sunfluss. [ 15 ] The Respondents argue that this is not a case that merits resorting to s. 248 of the ABCA , and that its use is premature pending a trial on the merits. The Respondents further identify a third-party claim, alleging that Mr. Zhang has failed in his fiduciary duties toward Sunfluss.

This, they argue, supports their position that Mr. Zhang should be disqualified from having any oversight concerning that corporation’s legal strategy. Relevant Legislative Framework

[ 16 ] The Applicant seeks a remedy via s. 248 of the ABCA which states as follows: Compliance or restraining order 248 If a corporation or any shareholder, director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a corporation contravenes this Act, the regulations, the articles or bylaws or a unanimous shareholder agreement, a complainant or a creditor of the corporation may, in addition to any other right the complainant or creditor has, apply to the Court for an order directing that person to comply with, or restraining that person from contravening any of those things, and on the application the Court may so order and make any further order it thinks fit. [ 17 ] Some other pertinent provisions include the following: Duty of care of directors and officers 122(1) Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the director’s or officer’s duties to the corporation shall (

a) act honestly and in good faith with a view to the best interests of the corporation, and (

b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

(2) Every director and officer of a corporation shall comply with this Act, the regulations, articles, bylaws and any unanimous shareholder agreement.

(3) Subject to section 146(7), no provision in a contract, the articles, the bylaws or a resolution relieves a director or officer from the duty to act in accordance with this Act or the regulations or relieves the director or officer from liability for a breach of that duty.

(4) In determining whether a particular transaction or course of action is in the best interests of the corporation, a director, if the director is elected or appointed by the holders of a class or series of shares or by employees or creditors or a class of employees or creditors, may give special, but not exclusive, consideration to the interests of those who elected or appointed the director. Disclosure by directors and officers in relation to contracts 120(1) A director or officer of a corporation who (

a) is a party to a material contract or material transaction or proposed material contract or proposed material transaction with the corporation, or (

b) is a director or an officer of or has a material interest in any person who is a party to a material contract or material transaction or proposed material contract or proposed material transaction with the corporation, shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of the director’s or officer’s interest. (Emphasis added) [ 18 ]

Section 6.01 of the bylaws of Sunfluss states as follows: 6.01 Conflict of Interest: A director or officer shall not be disqualified by his office, or be required to vacate his office, by reason only that he is a party to, or is a director or officer or has a material interest in any person who is a party to, a material contract or proposed material contract with the Corporation or subsidiary thereof. Such a director or officer shall, however disclose the nature and extent of his interest in the contract at the time and in the manner provided by the Act.

Any such contract or proposed contract shall be referred to the board or shareholders for approval even if such contract is one that in the ordinary course of the Corporation's business would not require approval by the board or shareholders.

Subject to the provisions of the Act, a director shall not by reason only of his office be accountable to the Corporation or to its shareholders for any profit or gain realized from such a contract or transaction and such contract or transaction shall not be void or voidable by reason only of the director's interest therein, provided that the required declaration and disclosure of interest is properly made, the contract or transaction is approved by the directors or shareholders, and it is fair and reasonable to the Corporation at the time it was approved and, if required by the Act, the director refrains from voting as a director on the contract or transaction and absents himself from the director's meeting at which the contract is authorized or approved by the directors, except attendance for the purpose of being counted in the quorum. (Emphasis added) Analysis [ 19 ] To found a successful s. 248 ABCA application, the Applicant must first establish that it is a proper complainant for the purposes of this section.

Section 239 of the ABCA defines a complainant as follows: (b) “complainant” means (

i) a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates, (ii) a director or an officer or a former director or officer of a corporation or of any of its affiliates, [ 20 ] The parties do not dispute that LBM is properly a complainant as defined.

[21] It is evident that Mr. Cui has not followed the requirement to disclose his conflict of interest resulting from his position as adirector of both Sunfluss and Yizhong. As noted by LBM in paragraph 38 of their written brief: 38. At the time Cui became a director of Sunfluss, Sunfluss was a party to a material loan contract with Yizhong. The Applicant’sevidence is that Cui did not disclose the following relevant facts to the directors or shareholders of Sunfluss at the time he became adirector or at any time thereafter: a. That he was a director of Yizhong; b.

That he was a director of Yizhong’s majority shareholder; c. That he was the owner and director of Loyal Mega United Limited, which owns 39% of Yizhong. [22] Mr. Cui suggests that he informed Mr. Zhang and Mr. Du about the conflict; however, Mr. Zhang denies this, and there issimply no evidence of written notice having been provided to the board.

Section 6.01 of the bylaws requires that this notice be given inaccordance with the ABCA, and s. 120 of the ABCA further requires that this such notice be made in a written form. [23] As written notice was not provided, s. 120 of the ABCA and

section 6.01 of the bylaws, were contravened. This further raisesthe question of whether Mr. Cui has met his obligation under s. 122 of the ABCA to act honestly and in good faith toward Sunfluss. Asdescribed in Peoples Department Store Inc (Trustee of) v Wise, 2004 SCC 68: The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-à-vis the corporation. They must respectthe trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objectsof the corporation.

They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personalbenefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must servethe corporation selflessly, honestly and loyally: see K. P. McGuinness, The Law and Practice of Canadian Business Corporations (1999),at p. 715. [24] Most of the argument that I heard, and particularly from the Respondent, did not focus on the merits of the s. 248 ABCAapplication; instead, I heard extensive argument relating to the merits of the underlying action.

For example, I heard lengthy argumentabout how truthful or reliable Mr. Zhang’s descriptions were concerning the formation and signing of the loan agreement. I also heardaccusations that Mr. Zhang had breached his fiduciary duties, which resulted in the third-party claim. In my view these arguments arenot apposite to the present application, which asks whether Mr. Cui has or will violate

section 248 of the ABCA and what remedy, if anywould be appropriate in the circumstances.

Section 248 of the ABCA [25]

Section 248 of the ABCA, and analogous provisions found within business corporations’ statutes throughout Canada, appear tobe rarely resorted to, consequently, there is little academic or jurisprudential discussion (See, for example, §22.271 to §22.273 in K.McGuinness, Canadian Business Corporations Law, 3rd edition, (Toronto: Lexis Nexis Canada, 2017)). The parties before me had verydifferent views relating to the s.248’s

interpretation and application. [26] The Applicant cites Sumner v PCL Constructors Inc, 2010 ABQB 536 and B. Welling’s Corporate Law in Canada – TheGoverning Principles, 2nd edition, (Toronto: Butterworths, 1991) in support of the argument, at least theoretically, that virtually anyremedy is possible so long as a breach has been appropriately established under s. 248 of the ABCA. [27] There are two issues with respect to the broad nature of this submission. First, The Court of Appeal of Alberta at 2011 ABCA326 reversed Sumner, and further leave to appeal was denied by the Supreme Court of Canada.

The Court of Appeal’s decision inSumner, at para 47, also questioned whether s.248 of the ABCA permits a remedy in damages. At a minimum, the Court of Appeal heldthat the damages awarded were excessive and disproportionate to the breach. [28] Second, in my view, Professor Welling’s consideration of s.248 of the ABCA does not support the broad

interpretation of thissection as urged by the Applicant. As Justice Hollins notes in Kasumu v Musah, 2018 ABQB 242, at paragraph 8, “[i]t is generallyaccepted that this provision of the ABCA affords a narrower discretion to this Court to grant relief than would be the case under s. 242 ofthe ABCA, known as the oppression sections.” This makes practical sense because, unlike the other sections in

Part 19 of the ABCA, theprerequisites for an application under s. 248 of the ABCA are more easily established, when compared to the procedural guidelines unders. 240 of the ABCA for a derivative action, or the more stringent requirements of establishing oppressive or unfairly prejudicial conductunder s. 248 of the ABCA.

As noted by the Court of Appeal in Sumner there must also be proportionality between the breach and theremedy; however, that s. 248 of the ABCA exists only to remedy technical breaches. [29] Professor Welling’s textbook, however, does highlight what must be considered when an application is brought under s.248 ofthe ABCA, and the engagement of judicial discretion when considering an appropriate remedy. [30] The Respondents primarily oppose the granting of a remedy under s. 248 of the ABCA because of identified complexities inthe material facts and significant factual disputes; such that, they argue, the material issues would best be resolved by a full trial on themerits.

In support of this argument they cite, Caleron Properties Ltd. v. 510207 Alberta Ltd, 2000 ABQB 720 at para 30: Of course, the complexities of fact and law involved in a given case may well militate against a

summary disposition of the matter. Thatis not to say difficult issues of fact and law cannot be treated under s. 240 [the analogous provision to

section 248 in the previous ABCA];it is ultimately within the discretion of the Justice in Chambers to determine whether there is sufficient evidence upon which to grantsummary relief. However, this judicial discretion must not be confused with a lack of judicial jurisdiction. […] [31] The Respondents also rely on Re Goldhar and Quebec Manitou Mines Ltd et al, (ON SC), 61 DLR (3d)

612; however, I would note that the reasoning found in Re Goldhar was questioned by this Court, as is evident in the remainder of para 30: [...] The result in Goldhar would appear to be correct, given that the Court was faced with an elaborate set of disputed facts and a novel question of law, indicating the need for a full trial.

But the application would have been more properly dismissed, in my view, based on the judicial discretion conferred by s. 261, rather than on any perceived lack of jurisdiction under that provision. [ 32 ] An approach to s. 248 of the ABCA that involves the use of appropriate judicial discretion, following an established breach, was endorsed by Professor Welling and also formed a point of some emphasis in Caleron .

I agree that a cautious employment of judicial discretion is appropriate when a court considers available remedies under s. 248 of the ABCA . [ 33 ] The Respondents further argue that Kasumu at paras 40-41 , does not support a remedy under s. 248 of the ABCA because Hollins J did not in the circumstances before her consider it appropriate to exercise her discretion to “take all steps necessary”; that is, an order which would replace the existing guarantees with ones limiting the liability of the minority shareholders.

It is important to note, however, that Justice Hollins was asked to consider s.248 of the ABCA in circumstances where the underlying contract was between the parties and a third-party bank. Justice Hollins held that she was effectively being asked to re-write the contract that the parties had agreed to. Justice Hollins decided that this was inappropriate. As Justice Hollins states: While s.248 of the ABCA may give me relatively broad discretion to fashion remedies, I do not believe that jurisdiction extends to trying to re-write contracts between a third-party bank and these parties.

I understand that the Applicants were only wanting a direction that EaglesMed attempt to do this but that is still not an appropriate exercise of my discretion. There was insufficient evidence before this Court to find that the guarantees were not signed voluntarily. While the Applicants were not required to sign joint and several guarantees, nothing in the USA precluded that possibility. That is supported by the inclusion of the inter partes indemnification for liabilities incurred outside the shareholding percentages of the respective shareholders.

In short, there may be other ways in which the Applicants can deal with reallocating those liabilities but, in my view, that is not a proper order for me to make under s. 248 of the ABCA . It is important to note that Justice Hollins did provide some relief under s. 248 of the ABCA while referring to the “relatively broad discretion” afforded by the section. This included ordering a law firm to remain responsible as a records address despite the difficulties that could arise from the conflict between directors, at paras 52 and 53. [ 34 ] In

summary, to properly found an application under s. 248 of the ABCA , it is necessary to establish a breach of the Act, the regulations, the articles, bylaws or a unanimous shareholder agreement, and upon establishment of such a breach, a complainant or creditor can appropriately apply to this Court. This Court has relatively broad but not untrammelled discretion under s. 248 of the ABCA . This is because the imposition of any remedy must necessarily be related to and proportionate to any established breach.

The Present Application [ 35 ] First, as mentioned above, there is no question that the Applicant is properly a complainant for the purposes of the present application. [ 36 ] Second, Mr. Cui did not disclose his material conflict of interest as required by the bylaw and the ABCA in writing, regardless of the ultimate resolution of the question that asks whether he made oral disclosure to Mr. Zhang and Mr. Du.

In my view, based upon the foregoing, the Applicant has established a breach as required under s. 248 of the ABCA . [ 37 ] The real question is whether this is an appropriate case for me to exercise my discretion under

section 248 of the ABCA to grant a remedy for this breach and, if so, what remedy should be granted. [ 38 ] As noted, the primary argument raised by the Respondents is that this is not a proper case for a remedy because the facts are too complex and because there are numerous unresolved factual disputes. [ 39 ] There is no question that there are several unresolved factual disputes as between the parties.

Much of the written and oral argument that I received focused on these factual disputes. [ 40 ] I also acknowledge that courts are rightfully reluctant to involve themselves in corporate affairs, as exemplified by the “business judgment rule”: Peoples Department Store Inc (Trustee of) , at paragraph 64. [ 41 ] What makes the present application unusual is that by exercising my discretion to grant the remedy sought by the Applicant, I would assist by ensuring that a full trial on the merits occurs (unless there is some settlement or some form of

summary judgment or dismissal). In this sense, an exercise of my discretion under s. 248 of the ABCA would provide an effective answer to the arguments made by both the Applicant and the Respondents. I say this because, despite the Respondents’ contention that this application should not succeed because of the underlying factual disputes, it is the granting of a remedy that would best serve to ensure that those factual issues find some resolution. If I decline to order a remedy, as earlier noted, Mr. Cui would have the ability to replace Mr.

Zhang with his own nominees on the board, thereby gaining effective control over whether the underlying action will be defended and, relatedly, whether Sunfluss’ would pursue its counterclaim. If this occurs, the full merits likely will not be heard. [ 42 ] When considering my discretion under s.248 of the ABCA , it is worth noting that the Applicant originally sought some overbroad remedies. For example, the Applicant sought an order directing that Mr. Zhang would maintain total control over any litigation regardless of his status as a director.

This would be disproportionate to the breach, would constitute an inappropriate remedy, which would have the effect of undermining basic principles of corporate law by impowering a minority shareholder with the ability to control a corporation’s litigation response. During oral argument, the Applicant wisely limited the remedy sought to an order that effectively would require Mr. Cui and his nominees to recuse themselves from discussing or voting upon matters relating to Sunfluss’

defence and counterclaim. [ 43 ] I agree with the Applicant in these circumstances that this is an appropriate remedy. Mr. Cui’s failure to disclose his material conflict of interest in the present instance (at least in writing); his vote to exercise the demand clause in the Yizhong loan; his vote to sue Sunfluss for default; and his vote not to engage legal counsel to defend the lawsuit, all occurring while on the Sunfluss board, operate together to demonstrate what might be described as serious breaches of his fiduciary duty.

Further, the absence of any agreement that he would not work to dismiss the defence of Sunfluss or to withdraw Sunfluss’ counterclaim, raises serious questions about whether a trial concerning the merits of the underlying action will ever occur in the absence of some intervention by this Court. In my view, this is an appropriate circumstance to make an order under s. 248 of the ABCA . [ 44 ] Jianjun Cui and his nominees from RM Corporation, as directors for Sunfluss, shall recuse themselves from voting on any motion related to the Yizhong Action, including Sunfluss’ defence and counterclaim.

Costs [ 45 ] I order the costs of this application be determined in the cause. I say this because of the unique nature of this application and because of my recognition that it is not clear, at this stage, as to the merits of the underlying action. Heard on the 19 th day of April, 2023. Dated at the City of Calgary, Alberta thi s 16 th day of May, 2023. D.A. Labrenz J.C.K.B.A. Appearances: Jeffrey L. Smith, K.C. and Elizabeth Argento for the Applicant Lillian Y. Pan, K.C. and Christy J. Lee for the Respondent