Corporate Democracy and the Frum Investor:
Halakhot of Investing in the Stock Market
by Rabbi Asher Meir
Rav Asher Meir is a fellow at Machon Keter, a
think-tank which studies halakhic aspects of economic activity. Aside from
his Talmudic studies, he completed an advanced economic degree at MIT.
I. THE NATURE OF STOCK OWNERSHIP
The extent to which stock ownership is considered active
partnership in a corporation is a critical question in numerous areas of halakha.
Conceivably, by buying a single share of stock a person could find himself
committing transgressions from all four sections of the Shulchan Arukh! Some
from Orach Chaim - Shabbat prohibitions such as
profiting from one's business, employing Jews and working animals;
posssessing leaven during Passover,
from Yoreh De'ah - benefiting from a mixture of milk and
meat, from avoda zara, and from orla; lending and borrowing at interest,
doing business in forbidden foodstuffs;
from Even Ha-Ezer - being a partner in licentious
from Choshen Mishpat - being a partner in robbery,
withholding of wages, or commission of damages.
This article will not discuss all the halakhic issues
relevant to the limited liability corporation, but only possible problems
in the actual ownership of stock. Due to its length, the article will be
presented in two installments.
A. WHAT IS A CORPORATION?
In order to study the rules governing the corporation,
we must have a clear idea of what a corporation is. There are three main
characteristics of a modern corporation:
Limited liability: Any debts of the corporation are
collectable only from the assets of the corporation itself, and not from
the assets of the individual shareholders. In a normal partnership, even
private assets of all partners are subject to collection by the
Separation of ownership and control: The shareholders
per se do not have any control over the corporation; all they can do is
appoint directors and managers who will exercise day-to- day control.
Legal personality: A corporation can sue and be sued,
survives until it is dissolved without any dependence on the lives of its
owners and managers, and is in every way considered to be an independent
It is not always recognized that these properties, while
related, are not technically interdependent. They are not even legally
dependent, and have independent expression in the secular law. Consider the
following instances: In a limited partnership, the limited partner enjoys
limited liability without the firm having a legal personality; in some
states, an ordinary partnership can be a legal person, but there is still
unlimited liability; a trust exhibits separation of ownership and control,
but is not a legal person nor is it limited in its liability.
A proper understanding of the distinctions between these
properties is essential, because different properties are relevant to
different areas of the law. For instance, we will see that regarding
forbidden interest, day-to-day control is not a factor, whereas liability
may very well be. But with respect to Shabbat, control is a critical issue,
and liability may be less significant. Legal personality may not constitute
a leniency in any particular prohibition, and yet may be successful in
preventing "mar'it ayin" - the appearance of wrongdoing.
B. THE ROLE OF THE SHAREHOLDER
There are halakhic authorities who absolve the average
shareholder of any responsibility for the actions of the companies whose
shares he owns. The ultimate basis of the lenient position is the
perception of the investor not as an owner, but rather as a creditor. Stock
purchasers lend money to the company in return for a note - the stock
certificate - which promises distributions of profits which are a kind of
interest payment. The assets of the company are collateral on the loan. To
a large extent, this gets the investor "off the hook;" after all,
there is no general prohibition of lending money to individuals who may use
it for purposes which would be forbidden to the lender himself.
Of course this approach raises an obvious question: if
the shareholders are not the owners - the ones who bear responsibility -
then who is? Several answers are given to this question:
A few authorities take the secular-law concept of a
legal person at face value: the corporation itself is the owner. The
halakhic justification for this is sought in legal-person- like entities
such as the "tzibbur" (community) or "hekdesh"
(Temple-owned property); in the authority of the secular law in monetary
matters; or in the power vested in halakhic authorities to innovate new
forms of ownership just as secular legislators do. (R. Dichovsky, Piskei
Din Rabani'im Vol. X p. 273).
Alternatively, the management of the company may be
considered to be the "real" owners, who owe the shareholders a
share of the profits. Or, if there is a controlling interest, then the
controlling shareholders may be considered the "real" owners,
leaving minority shareholders as run-of-the-mill creditors. R. Moshe Feinstein (Igrot Moshe, EH
Vol. I, 7) inclines toward this alternative lenient view in the specific
case of a small shareholder who is not interested in influencing company
The major halakhic authorities have not accepted the
"legal-person" view of the corporation. R. Yitzchak Weiss (Minchat
Yitzchak Vol. III, 1) cogently points out that even the secular law does
not view the corporation's legal personality as entirely independent of its
owners. We can give examples of this principle: The law views the managers
and directors as trustees of the shareholders; they have a fiduciary
responsibility to the shareholders as owners of the corporation. Some
rights of shareholders are manifestly rights of ownership: the right to
examine the books of the company; to sue the management on behalf of the
shareholders; to propose resolutions to be voted on by all shareholders.
The fiduciary duty of management to act in the interest
of the shareholders also weakens R. Feinstein's position that management
could be considered the true owners. The same is true of controlling
interests, who are likewise viewed as fiduciaries of minority shareholders.
Tellingly, minority shareholders can sue management or controlling
interests for acting against their best interest. And even according to R.
Feinstein, there is presumably no leniency in the case where management is
not firmly entrenched against a potential corporate raider who could enlist
the currently-passive small shareholder on his side; this description
probably characterizes most large companies traded on the stock market in
However, R. Weiss does exempt the shareholder if he has
no voting rights (e.g., preferred stock). R. Moshe Sternbuch is stringent
even in this case as long as the stock represents a defined percentage of
the company's assets (Mo'adim U- zemanim Vol. III, 269, note 1). However,
R. Sternbuch suggests a leniency in the case of a non-Jewish company due to
a technical flaw in the shareholder's kinyan (acquisition) which, though he
is unwilling to rely upon fully, he is prepared to combine with other
To summarize, it seems that the most common view among
major authorities (R. Moshe Feinstein, R. Yitzchak Weiss, R. Moshe
Sternbuch, R. Menashe Klein, R. Shlomo Zalman Auerbach) is to view the
corporation as an ordinary partnership, while accepting its limited
liability to its creditors - though not to injured third parties. Each
authority mentions leniencies which apply to special cases, but these are
not due to the special legal status of the corporation, but rather to
specific aspects of the stockholding which could apply just as well to an
Of course this does not answer our question but only
allows us to ask it properly. What are the halakhic responsibilities of a
shareholder in the unique partnership known as a corporation? This requires
us to examine the particular traits of each prohibition.
II. SPECIFIC PROHIBITIONS
A. FORBIDDEN INTEREST
The most often discussed issue with respect to
corporations is that of "ribit" - lending or borrowing at
interest from a Jew. Mutual savings plans (in which depositors are really
partners in providing funds to borrowers) became popular already in the
beginning of the last century; Jews were among the lending partners and
also among the borrowers. The fact that the funds are in the control of
non-Jewish managers is of no consequence; the Tosefta (Bava Metzia 5:8)
clearly states that the prohibition of interest is dependent only on who
owns the lent funds - not on who manages them. Since these funds belong
jointly to all of the shareholders, both lenders and borrowers seem to be
taking part in a forbidden interest transaction among Jews. This stringent
position is indeed that of the Kitzur Shulchan Arukh (65:28).
However, in the case where the majority of shareholders,
as well as the majority of lenders, are non-Jews, many authorities take a
lenient view. A variety of reasons are given for a permissive ruling. One
justification assumes that there is at most a rabbinic interdict (as
opposed to a biblical one) - due to the technicalities of the loan process
- and this allows us to rely on "bereira" or selection: we assume
that the Jewish shareholders lend only to non-Jewish borrowers, and the
Jewish borrowers borrow the funds of non- Jewish shareholders specifically
(Sho'el U-meshiv I:3:31). Some authorities considered the "legal
person" status of a corporation to be relevant specifically to this
prohibition (Tzofnat Pa'a'ne'ach 184); others view the total control of
management as tantamount to ownership of the funds (Mishneh Halakhot
The conclusion of R. Menashe Klein (Mishneh Halakhot
loc. cit.) is that even though the reasons for ruling leniently are various
and even contradictory, since the consensus is to permit owning stock in a
company with majority non-Jewish management and ownership which lends at
interest, it is possible to rely on the permissive view.
There are numerous prohibitions which relate to running
a business on Shabbat.
Two of them, working one's slave or beast, are of Torah origin and are dependent on
ownership. Practically, the problem is limited to animals, since
few-publicly owned corporations own slaves (though it may be that the
definition of slave or servant for the purposes of Shabbat is broader than
for other laws; see Rambam
Shabbat 20:14). It is advisable not to hold stock of a corporation which
owns animals that labor on Shabbat.
The other restrictions, relating to the ban on directing
others to do one's labor on Shabbat or even having them do so without
orders, are of rabbinic origin and relate primarily to direct control.
According to R. Feinstein (Igrot Moshe OC Vol. IV, 54), control is in the
hands of management; the management resembles a sharecropper or contractor
who acts on his own initiative, and not a hired worker. Therefore, a Jew
may hold even a majority interest in a corporation which does business on
Shabbat, provided that the controlling management is predominantly
non-Jewish. (Minchat Yitzchak Vol. III, 1 rules likewise). In the case
where the Jew is the primary owner, his ownership should, for appearances'
sake, not be publicly known.
If the management is primarily Jewish, severe problems
arise, since it is still prohibited to have a Jew work on Shabbat even on
his own initiative. Several authorities have permitted, in case of great
need, a partnership with a Jew who would have worked on Shabbat regardless,
if a condition is made that the business belongs to the shomer-Shabbat
partner only on weekdays (Igrot Moshe OC Vol. IV, 55, Chelkat Ya'akov Vol.
II, 54, Tzitz Eliezer OC Vol. II, 65); perhaps the company management, who
are the representatives of the shareholders, are empowered to authorize
such a condition with an individual shareholder.
If the company's business cannot be conducted without
Shabbat operations, this resembles the case of having the market day on
Shabbat, and it is difficult to be lenient (see Shulchan Arukh OC 307:4 and
Mishna Berura 15, Sha'ar Ha-tziun 15). This presumably refers to a case
where business is impracticable, and not merely unprofitable, on weekdays
Source: Reprinted with permission from Jewish Law Articles
Original Source: Yeshiva Har
Etzion Virtual Bet Midrash