Posted on Jul 17, 2018 by Richard S. Dukes
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.
Why does this matter?
In the case, South Carolina’s Supreme Court limited the single business enterprise or amalgamation of interests theory. Common ownership and control, similarities between the companies, shared finances or mutual purposes is no longer sufficient to negate a business owner’s choice of corporate structure. Further, the fact that business owners chose a structure specifically to shield themselves from personal liability or ignoring corporate formalities, such as annual meetings, will not warrant veil-piercing.
Instead, the party seeking to pierce the corporate veil must establish: “bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities’ legal distinctions.”
In adopting this narrowly drawn common enterprise theory, the Court has now clarified that businesses can create subsidiaries in order to shield themselves and their owners from liability. The Court further held that equitable disregarding of the business entity only can take place upon a showing of bad faith or abuse, fraud, evasion of existing obligations, circumvention of statutes, monopolization, criminal conduct and the like.