July 17, 2018
South Carolina has loosely addressed the amalgamation of interests theory for more than three decades, generally finding that separate corporate entities may be viewed as one if there has been an amalgamation of the corporate interests and activities to the point the lines between the corporations and their ongoing activities are no longer distinguishable. Until recently, however, there has not been a decision of the South Carolina Supreme Court providing a detailed examination of the amalgamation theory. Now, the Supreme Court has formally recognized the single business enterprise theory. Pertuis v. Front Roe Restaurants, Inc., et al, 2018 WL 3297910 (July 5, 2018). Here, a brief look into the court’s decision, and how it got there.
Over a period of years, Mark and Larkin Hammond formed and were the sole shareholders of two North Carolina S-Corporations that owned and operated restaurants there and a South Carolina S-Corporation that owned and operated a restaurant in this state. They hired Pertuis beginning in 2000 as a manager for the first restaurant, and as the business ventures were established, Pertuis’ duties expanded to each. His compensation included an ownership interest in each corporation, achieved through an agreed vesting schedule. Eventually, in late 2009, Pertuis advised the Hammonds of his discontent and the parties ultimately parted ways. One of the corporate entities filed a declaratory judgment action against Pertuis, seeking a ruling it did not have to provide its corporate records to Pertuis without protection against publication of its proprietary information.
Pertuis filed counterclaims and third party claims alleging he was an oppressed minority shareholder, forced out of the businesses in bad faith and consequently entitled to a forced buyout of his shares. Following the claims on behalf of Pertuis, the parties were realigned to their current positions. A bench trial resulted in a determination that the three corporate entities should be amalgamated into a single enterprise operating out of South Carolina, found Pertuis was an oppressed minority shareholder, and awarded him accordingly. The Hammond entities appealed and the court of appeals affirmed. The matter was before the Supreme Court on certiorari.
In reaching its decision, the court first examined the internal affairs doctrine. This choice of law rule provides that the law of the state of incorporation controls the internal affairs of corporate governance. South Carolina has long honored that general rule, finding it is not authorized to regulate the internal affairs of a foreign corporation even if registered to do business in this state. However, veil piercing implicates disputes reaching beyond the corporate boundaries. Viewing the issue before it to be less related to the internal governance of the corporations than whether the entities in question operated as a single business enterprise, the court found the internal affairs doctrine did not bar its review of the amalgamation question.
Historically, South Carolina has recognized “amalgamation” where the interests and activities of separate entities have been integrated so as to blur the lines between them. Here, the court chose to examine the theory in greater detail. While finding no other jurisdiction employs the term “amalgamation,” at least fourteen states recognize a theory pursuant to which corporations will be viewed as a single enterprise where they unify their activities and their resources to a common business goal and where continued recognition of separate corporate entities would defeat justice. The rationale of the various jurisdictions differ, but the court found its proper focus to be the relationship between the multiple entities and the legitimacy of the entities’ use of limited liability.
In its finding, the court was careful to acknowledge that corporations are frequently formed to protect shareholders from individual liability, which it recognized as a legitimate undertaking. Thus, in order to successfully assert a single business enterprise theory, there must be more than an intermingling of corporate operations, there must also be evidence of bad faith, abuse, fraud, wrongdoing or injustice arising from the intertwining of those operations. Consistent with other theories of piercing the corporate form, equitable principles govern the application of the single business enterprise theory; it is not to be applied without considered analysis.
Now, after years of speculation as to the exact form and application of an amalgamation concept, the court has formally recognized the single business enterprise theory. In doing so, the court has dramatically sharpened the focus of veil piercing efforts, rejecting the premise that the mere formation of a corporation in order to shield shareholders is villainous or that unified business operations alone are evidence of nefarious intent.
Instead, the court reiterated that a corporation will be viewed as a separate legal entity unless the party seeking to pierce the corporate veil establishes it is being used for purposes that are fraudulent, unjust or defeat public policy. Pertuis provides the foundation we have long awaited, but because the court did not find wrongful conduct, we will have to wait for the application of this new, improved theory.
Cheryl D. Shoun is a trial attorney and certified mediator whose experience includes construction law, insurance defense, personal injury defense, employment litigation and medical malpractice. As a frequent writer, she serves as editor for Nexsen Pruet's TIPS: Torts, Insurance and Products Blog.