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S.C. Supreme Court Sets Criteria to Pierce Corporate Veil of Sibling Businesses

On July 10, the South Carolina Supreme Court handed down an important decision in Pertuis v. Front Roe Restaurants, establishing the criteria to determine when the corporate veil can be pierced horizontally – in other words, when a court can disregard the corporate form of sibling companies having common ownership, control, officers, or members.

The practice of corporations joining forces with others that share business goals, leadership and even finances to mitigate personal liability for those in charge is not a new one. The merging of business interests has long-been debated, going back to a 1986 Court of Appeals decision in Kincaid v. Landing Development Corp. The theory generally states that, “where multiple corporations have unified their business operations and resources to achieve a common business purpose and where adherence to the fiction of separate corporate identities would defeat justice, courts have refused to recognize the corporations’ separateness, instead regarding them as a single enterprise-in-fact.” Corporate entities could be combined into a single entity if their interests, entities and activities are so interconnected, “as to blur the legal distinction between the corporations and their activities.” Kincaid v. Landing Dev. Corp., 289 S.C. 89, 96, 344 S.E.2d 869, 874 (Ct. App. 1986).

The South Carolina Supreme Court’s latest decision in Pertuis v.  Front Roe ruled in a minority shareholder oppression dispute between the owners of three restaurants and their general business manager, who claimed part ownership in the entire enterprise. The restaurants were incorporated separately in North and South Carolina but had the same shareholders and general manager. The general manager sued the majority shareholders claiming part-ownership in the entire operation and asserted that he was entitled to a percentage of the entire business as a buyout. 

The trial court found that the S-corporations owning each of the three restaurants were a “partnership.” It disregarded the corporate entities and awarded the general manager a cut of the whole. The Court of Appeals affirmed.

Ultimately, the Supreme Court rejected the lower courts’ refusal to respect the individual corporate forms of the three S-corporations.

In so doing, the South Carolina Supreme Court, for the first time, adopted the single business enterprise theory and established the criteria for disregarding the corporate existence of commonly owned sibling entities. 

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Finding Your Next GC: Succession Planning for Corporate Law Departments

The general counsel of a business is integral to executing the company's strategy, handling litigation, overseeing compliance and, ultimately, the bottom line. So why do corporate law departments tend to pay so little attention to succession planning for the role?

Many GCs simply feel they don’t have enough time to look ahead, given day-to-day work and immediate needs to advance their strategic priorities. Moreover, not everyone thinks that succession planning is in his or her best interest. And, all too often, a burgeoning plan is sabotaged by a lack of progress in identifying and training successors.

How can a law department break through inertia and make a solid GC succession plan?

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Avoid These Legal Snares in 2016

We always like to look ahead and advise our business clients about legal issues that may receive more attention throughout the year. Some are pushed to the forefront by public policy and politics – immigration, for example. Other issues, such as data protection and workplace harassment training, always are important, but the beginning of the year is a good time to review whether your business follows best practices.

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Creditors’ Rights Trump Ownership Restrictions in LLC Operating Agreements

A recent South Carolina Supreme Court decision affirms the supremacy of creditors’ foreclosure rights, and sounds a cautionary note for LLCs. The state’s high court said that LLCs can’t use an operating agreement to force a creditor to sell a distributional interest it obtained via judicial foreclosure. 

The ruling came in Levy v. Carolinian, LLC, a case involving an LLC that owns an oceanfront hotel. One of the members, who owned about a quarter of the LLC, found himself on the wrong end of a judgment for $2.5 million. Creditors obtained a charging order – essentially a lien – against their debtor’s distributional interest in the LLC. The creditors then foreclosed on its charging lien and purchased the member’s distributional interest at public auction. 

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Why You Must Renew South Carolina Buy-Sell Agreements to Reflect Inclusion of Goodwill

A recent South Carolina court ruling has adopted the emerging majority approach utilized by the courts nationwide, and for the first time has recognized the distinction between “enterprise goodwill” and “personal goodwill” for equitable distribution purposes in a divorce action. 

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Why Your Lawyer and Accountant Should Work as a Team

One of the first things I do when I get a new business client is to ask if they have a relationship with an accountant. With the client's permission, I'll call the accountant, introduce myself and open up the lines of communication between us. 

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What You Need to Know about Estimating the Value of Your Business

If you're considering buying or selling a business, including it in estate planning or setting terms for a buy-sell agreement that is part of succession planning, you want to know what it's worth. While valuing a business certainly includes subjective judgments, there is a method to arriving at an accurate estimate.

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Key Legal Issues for Entrepreneurs

If you're thinking of starting a business, you likely are focused on how to sell the product or service you plan to offer. But don't neglect to set up a legal framework that will protect your business and allow it to thrive. In our litigious society, a working knowledge of business law and a relationship with a law firm has to be part of your entrepreneurial toolkit. 

Here are six areas where we recommend that first-time entrepreneurs protect themselves by getting good legal counsel at the outset to reduce the possibility of problems down the road.

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Plan for Succession Even if You Plan to Work Forever

You may be one of those business owners too busy being successful to think about succession planning. Nonetheless, it is folly not to plan for your succession, and your strategy should follow the old adage of “hope for the best and plan for the worst.”  Assuming the worst – that you would unexpectedly leave the business tomorrow – do you have plans in place for transition in management, what happens to your ownership interest, and how to use your stake to provide for a spouse and family members?

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Don’t Automatically Include Arbitration Clauses in Commercial Contracts

For years, mandatory arbitration clauses have been almost automatically included in many commercial contracts, because they’ve been regarded as cost-effective detours for matters that might otherwise work their way through the courts. Over the last few years, we’ve adopted a more critical view of arbitration, and now regard it as a good strategy for some clients, but not for others.

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How to Write a Workable Non-Compete Agreement

Employers invest time, training and trust in key employees, and they don’t want to see them walk out the door and help a competitor. Non-compete agreements can protect your investment in employees – but only if they’re written with reasonable restrictions. 

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Don’t Allow Your Business to Become a Victim of the Dreaded Ds

Is your closely-held business protected from the five dreaded Ds – death, disability, divorce, disaster and disagreement?

Turmoil, and even business failure, can follow if you don’t have a legal succession plan in place when any of these events occur. While this may not offer you any comfort, you are certainly not alone if you haven’t yet set up a succession plan: fewer than half of closely-held and family-owned businesses have a plan in place that covers these contingencies.

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Don’t Misunderstand the Memorandum of Understanding

Can a city change its mind about development partners after signing a memorandum of understanding (MOU)? 

That question bounced around in South Carolina courts for a decade, and the state Supreme Court issued the final answer last summer. A city – or any party – may back out of an “understanding” that doesn’t include a definitive agreement. 

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