South Carolina Supreme Court clarifies Single Business Enterprise criteria: shared ownership, shared management, and a lack of corporate formalities are insufficient in proving Single Business Enterprise where statutory requirements for corporate structure allow for lack of corporate formalities and there is no evidence of bad faith; Single Business Enterprise requires evidence of bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities’ legal distinctions. Pertius v. Front Roe Restaurants, Inc., Case No. 2016-000749 (Sup. Ct. S.C. July 5, 2018).
Owners of two restaurants in North Carolina and one in South Carolina contracted with an individual manager to manage the restaurants. Each restaurant was owned by its own closely held S-corporation incorporated in its respective state. As compensation, the manager was entitled to minority ownership interests in the restaurants. The two North Carolina restaurants awarded ownership interests based on five-year vesting schedules, but there was disagreement over the terms of the final vesting schedule for the South Carolina restaurant. The manager’s employment terminated and he sought a buy out of his minority ownerships.
The trial court found that under South Carolina law the three corporate entities should be amalgamated into a “de facto partnership” operating out of Greenville, South Carolina, and awarded the manager a 10% interest in each of the two North Carolina corporations and a 7.2% interest in the South Carolina corporation. In finding a de facto partnership, it considered that all three entities had the same shareholders and same managing partner, that there was considerable movement of corporate funds between the three corporate entities, that the three corporate entities shared a website, and that there was a disregard for corporate formalities, including an absence of shareholder and board of directors meetings and a conveyance of a boat to avoid liability and minimize insurance premiums. In addition to the partnership interest, the trial court also awarded a total of $99,117 in corporate distributions from the three restaurants. The Court of Appeals affirmed. The Supreme Court of South Carolina reversed in part, vacated in part, and affirmed as modified in part.
The Supreme Court of South Carolina agreed that South Carolina law could be applied to the single business enterprise theory since the manager lived in South Carolina, one of the corporate entities was a South Carolina corporation, and much of the conduct at issue occurred in South Carolina. While formally recognizing single business enterprise theory, the South Carolina Supreme Court disagreed that the three closely held corporations were a single business entity, despite the shared ownership, movement of corporate funds, and disregard for corporate formalities. The Court reasoned that, as S-corporations, the entities were statutorily authorized to forgo corporate formalities, and absent any evidence of bad faith, were not a single business enterprise. It clarified that the single business enterprise theory requires “evidence of bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities' legal distinctions.”
After determining that the corporations were separate entities, the South Carolina Supreme Court reversed the Court of Appeals’ decision as it related to the North Carolina corporations and found that the evidence in the record conclusively demonstrated that the manager’s ownership share in the South Carolina corporation was 1%, based on the initial vesting schedule for the South Carolina restaurant. It affirmed the balance of the judgment.