Jewish Law and Modern Business Structures: The Corporate Paradigm

Michael J. Broyde^* & Steven H. Resnicoff^**

The Wayne Law Review; Fall, 1997; 43 Wayne L. Rev. 1685

Copyright (c) 1998 Michael J. Broyde & Steven Resnicoff

SUMMARY:

... Many religious systems purport to govern both the financial and ritual activities of their adherents at the same time that these adherents are ruled by secular legal systems. ... Rabbi Joseph Karo rules that secular law is binding under Jewish law only to the extent that it directly affects the government's financial interests. ... Second, which doctrine is used to justify the limited liability rule may also affect the Jewish law rule as to consensual creditors in cases where secular law pierces the corporate veil. ... The halakhic entity approach and Weiss' halakhic creditor approach would rule that a nonvoting shareholder in a public corporation is not a partner in the corporation and is not an owner of any part of the corporate assets. ... It is unclear whether others supporting the halakhic entity theory would apply it in the case of a close corporation, even one that is less extreme than the single shareholder, director, officer, employee example involving the bakery. ... If Weiss only distinguishes between voting and nonvoting stock, he would have to find that a nonvoting shareholder, even with a significant say in corporate governance, is a creditor who loaned money and not a partner who purchased a partnership interest. ...

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I. Introduction

Many religious systems ¹ purport to govern both the financial [*1688] and ritual activities of their adherents at the same time that these adherents are ruled by secular legal systems. This phenomenon raises a variety of fascinating questions regarding the conceptual and practical interrelationships between such overlapping systems. ² For [*1690] example, Jews are religiously obligated to comply with Jewish law (halakhah) dictates, and in many instances, religious courts may order them to do so. ³ An individual's rights and responsibilities under Jewish law frequently depend on whether the individual is deemed personally to be performing (or failing to perform) a particular action or is deemed personally to be the owner of particular property. In the modern world, however, Jews often participate in disparate business organizations, some of which are secular law creations. ⁴ Consequently, it becomes crucial to [*1691] determine whether, and to what extent, the use of these secular structures causes Jewish law to treat participants as principals with respect to the organizations' actions or owners of the organizations' property.

This Article explores the Jewish law consequences of the American corporate structure. ⁵ Corporations are ubiquitous in the American marketplace. They account for a large percentage of the national economy, and both consumers and businesses enter into transactions with corporations on a daily basis. Relatively few publications have discussed the Jewish law significance of corporations, and the few that have are disappointing. None has provided a detailed description of corporate governance or comprehensively dealt with the many different scenarios that diverse types of corporations present.

How Jewish law characterizes a corporation and whether it considers a Jewish shareholder to be responsible for corporate actions, an owner of the corporate assets, or a party to corporate lawsuits, play an important part in resolving countless Jewish law questions ⁶ and a decisive role in many others. For example, Jewish law requires that Jews pay their debts. ⁷ If a corporation becomes insolvent, must a Jewish shareholder use his personal resources to satisfy an unpaid corporate debt? Furthermore, Jewish law requires the giving of charity. ⁸ If a corporation makes charitable [*1692] contributions, has a Jewish shareholder fulfilled her personal obligation? Jewish law also proscribes particular acts. If a corporation nonetheless commits such acts, has its Jewish shareholder transgressed Jewish law? Jewish law forbids Jews from charging interest (ribit) when lending money to another Jew. ⁹ If a banking corporation exacts interest when it lends money to Jewish borrowers, has its Jewish shareholder disobeyed Jewish law, and is she obligated to return the interest that the corporation collected? Jewish law prohibits a Jew from owning certain leavened foodstuffs (hametz), hereinafter referred to as "dough," during the holiday of Passover. ¹⁰ If a corporation owns dough during Passover, has a Jewish shareholder violated this prohibition? Additionally, Jewish law forbids Jews from enjoying dough that, in violation of Jewish law, was owned by Jews during Passover. ¹¹ May a Jewish consumer purchase dough that was owned during Passover by a corporation with Jewish shareholders? Jewish law enjoins Jews from conducting certain types of businesses with non-kosher foods. ¹² If a corporation owns a supermarket that sells non-kosher foods, has a Jewish shareholder violated this ban? Jewish law forbids Jews from deriving benefit from foods that combine meat and milk. ¹³ May [*1693] Jews own shares in corporations that sell such products? Jewish law outlaws operating a business on certain days (for example on the Sabbath or other Jewish holidays) ¹⁴ or in certain ways. For instance, [*1694] in some cases Jewish law limits the extent to which prices can be marked up. ¹⁵ Under Jewish law, may Jews acquire or retain shares in corporations that violate these regulations?

When a corporation is involved in a dispute that may lead to civil litigation, it may be essential to determine whether the corporation or its shareholders are the real parties. For example, Jewish law does not ordinarily allow one Jew to sue another in a secular court, unless the plaintiff has first obtained express permission to do so from a rabbinical court. ¹⁶ If, however, a corporation is considered an independent legal entity, Jewish law may allow the corporation to sue or be sued in a secular court. Similarly, although Jewish law does not allow one Jew to recover from another for certain types of injuries, it may permit such recovery from an independent corporate entity. The identity of the parties also affects the conduct of a rabbinical court proceeding. In some situations a human being, based on his or her status as an orphan or widow, may be entitled to certain procedural advantages. A corporation, if an artificial legal entity, would not enjoy these benefits. ¹⁷ On the other hand, how Jewish law characterizes a corporation may determine whether a corporation, according to Jewish law, could be liable as a bailee (shomer) or tortfeasor (mazik) and whether portions of produce grown by a corporation must be made available to priests or to the poor. If a corporation is an artificial entity, it may not confront these types of liabilities.

The sparse literature on the relationship between corporate ownership and Jewish law obligations reflects the following five principal positions: ¹⁸

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1. The "Jewish law (halakhic) entity" approach. This view maintains that Jewish law deems a corporation to be an independent entity that owns its assets and conducts its business. ¹⁹ According to this view, shareholders do not own title to the corporate assets and are not in violation of Jewish law when the corporation commits a forbidden act.

2. The "halakhic partnership" approach. There are three versions of this view. ²⁰ The first contends that Jewish law recognizes a corporation as a partnership (shutfut). The shareholders are regarded as partners who own a percentage interest of the corporate assets. A second version maintains that Jewish shareholders are partners only if the corporation has primarily Jewish shareholders. A third alternative describes Jewish shareholders as partners only if they own voting shares.

3. The "halakhic creditor" approach. Some authorities who espouse the second or third versions of the halakhic partnership theory believe that Jewish shareholders who are not partners are, instead, creditors who have loaned money to the corporation or to the corporation's managers. ²¹ As creditors, such shareholders would not be responsible under Jewish law for the corporation's conduct.

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4. The "purchaser of entitlements" approach. At least one authority suggests that in many instances a Jewish shareholder is merely a purchaser of certain financial benefits vis-a-vis the corporation's future profits. ²²

5. The "relationship" approach. Some authorities do not use a single label to describe the abstract relationship between Jewish shareholders, on the one hand, and corporate assets and activities, on the other. Instead, they examine diverse aspects of the relationship and ask whether, as a whole, it constitutes ownership such as to implicate particular Jewish law problems. Exponents of this approach consider, for example, the shareholders' ability and intention to control corporate conduct and to use or sell corporate assets. ²³

Secular law and secular commercial models affect Jewish law on at least two levels. On one level, secular commercial institutions may create or involve "facts" that directly resonate in principles indigenous to Jewish law. For example, Jewish law often recognizes the Jewish law validity of commercial customs, and such customs may be based on principles of secular corporate law. Similarly, Jewish law involves presumptions regarding people's intentions and expectations. These presumptions may be shaped by corporate realities. On another level, Jewish law contains a doctrine, "the law of the land is the law" (dina de'malkhuta dina), which validates, for purposes of Jewish law itself, certain secular laws. In fact, dina de'malkhuta dina arguably provides a prism through which Jewish law perceives various commercial activities. ²⁴ Consequently, in [*1697] order to effectively evaluate alternative Jewish law theories regarding corporations, it is crucial to identify and examine the facts and circumstances of secular corporate law.

This Article, with its detailed study of how a well-developed religious legal tradition confronts secular law, provides a contrast to most "law and religion" literature. These publications seem largely preoccupied with whether a secular legal system should, [*1698] must, ²⁵ or constitutionally can adjust to religious culture, from the use of peyote in religious rituals ²⁶ to the rejection of blood transfusions, ²⁷ and from Sabbath observance ²⁸ to priest-penitent confidentiality. ²⁹ Scant attention is devoted to a different aspect of the interrelationship between secular and religious legal systems-how religious law responds to developments in the secular legal tradition. ³⁰ Moreover, the broader question as to how flexibly [*1699] religious law reacts or adapts to secular law concepts and institutions, and vise versa, is largely unexplored by secular legal literature. This Article represents an early foray into that field.

Part II describes the principal types of American corporations-and analogous commercial vehicles-and explains the primary secular purposes for, as well as the principal secular ramifications of, employing such forms. Part III provides additional information and inquires into the ways in which secular law characterizes these business vehicles and the relationships they create. Part IV sheds light on the arguably special circumstances surrounding insolvent corporations. In light of Parts II, III, and IV, Part V critically assesses the various Jewish law theories. Finally, Part VI explains how these Jewish law approaches apply in particular scenarios.

II. The American Corporation and Analogous Commercial Constructs

Under secular American law, when individuals join together pursuant to an oral or written agreement to engage in a commercial venture on an unincorporated basis, they are usually recognized as a general partnership. ³¹ The partners of a general partnership are deemed to be authorized agents for the partnership and/or for each other in connection with the conduct of partnership business. ³² [*1700] They also are personally liable for partnership debts. ³³ [*1701] Thus, if collection efforts by partnership creditors exhaust partnership assets, the creditors may collect any deficiency from individual partners. ³⁴ The risk of unlimited personal liability is a severe disincentive for participating in a partnership. ³⁵ In addition, a partnership's existence is precarious; for example, it typically [*1702] terminates automatically if any of the partners dies. ³⁶ Moreover, general partnership interests are not easily sold, partly because of the financial risk incurred upon becoming a partner. ³⁷ The corporate form is often used to avoid these problems. Although initially corporations were, at least for the most part, created by a special act of a ruler, such as an emperor or pope, ³⁸ corporations may now be easily formed by compliance with applicable state ³⁹ or federal law. ⁴⁰

Understanding what a secular corporation is and how American law characterizes it serves two purposes. First, it facilitates a comparison between this secular view and the Jewish law perspective. Second, and more central to the thrust of this Article, the secular characterization may influence the Jewish law rule itself [*1703] because, as will be more fully explained below, certain specific Jewish law doctrines give legal effect to secular law and secular commercial practice.

A few facts are essential to an appreciation of the modern corporation. There is a basic, although increasingly blurred, ⁴¹ distinction between corporations that are formed "for-profit" (known as business corporations) and corporations that are [*1704] "not-for-profit" or "nonprofit." ⁴² The essential difference between these two categories is that a business corporation has shareholders who are entitled to receive the corporation's distributions of net profits, while a nonprofit corporation does not have shareholders (although it may have voting or nonvoting members) and, in most cases, is forbidden from distributing its net profits. ⁴³

A business corporation is permitted to provide for the issuance of different classes of stock and different series of stock in each class. The types of stock usually vary as to their voting rights (some, in fact, may have no voting rights at all) and as to their economic rights. For example, holders of some stock, such as preferred stock, may be entitled to a specified annual return even if the company shows no profit in a particular year, while the holders of common stock are much more likely to be subject to discretionary decisions of the board. ⁴⁴ On the other hand, upon a corporation's dissolution, the return to preferred stockholders may be specifically capped, while common stockholders are entitled to the entire residual value of the corporation once corporate debts [*1705] have been paid. In addition, certain stock may be convertible, under specified circumstances and according to a particular schedule, from one form into another. Stock may be acquired from the corporation when it issues stock or may be purchased from a previous owner of the stock. State and federal law regulate the transfer and sale of stock.

Incorporation offers several principal advantages. ⁴⁵ First, shareholders or members are not ordinarily personally liable for a corporation's financial obligations. ⁴⁶ This insulation from personal liability is often referred to as the "corporate veil." ⁴⁷ The corporate [*1706] veil provides an incentive to start businesses or to participate as members in nonprofits. Similarly, confidence as to the limited extent of personal risk encourages investors to buy stock even when they realize that they do not have the time, expertise, or interest necessary to monitor a business' operations. Consequently, limited liability, which is often a chief reason for incorporation, ⁴⁸ affords prospective shareholders more attractive business and investment opportunities, while facilitating the raising of capital through the issuance of stock. ⁴⁹ Second, a corporation enjoys perpetual [*1707] existence. Neither the death of officers, directors, shareholders, or members, nor the transfer of ownership interests from one shareholder to another, terminates the corporation's legal authority to continue its business. ⁵⁰ Third, stock serves as a relatively liquid investment vehicle. In many instances, public trading in stock provides investors with some degree of assurance regarding a stock's value. The fourth advantage of incorporation is centralized management. ⁵¹ Not only does a shareholder have the right to refrain from personally participating in the corporation's decision-making processes, but even if he or she should want to influence the corporation's decisions, there are many restrictions on his or her right and ability to do so. Indeed, the dichotomy between control and beneficial ownership is a central feature of corporate law, ⁵² and one which, as discussed below, may be of central importance in the way in which Jewish law treats a corporation.

There is no authoritative topology of business corporations. Instead, assorted labels are utilized to refer to corporations that pursue specific activities, possess certain characteristics, or qualify [*1708] for particular tax treatment. ⁵³ For the purposes of this Article, it is useful to identify only a few of these labels.

1. Public corporations. In the United States, the term public corporation was initially used to denote a corporation "created for a political purpose, with political power, to be exercised for purposes connected with the public good in the administration of civil government." ⁵⁴ Thus, incorporated cities, villages, or towns were public corporations. More recently, however, the term public corporation is increasingly used to refer to a corporation whose shares are publicly traded; ⁵⁵ this is the way in which this Article employs the term. A public corporation usually has thousands of different shareholders who live throughout the world. Typically, no single individual or institutional shareholder owns an absolute majority of the shares of a public corporation.

2. Close corporations. The term close corporation usually refers to corporations with relatively few shareholders, who are either personally involved in the operation of the corporate business or who are related to those who are, and whose stock is not traded publicly and is subject to significant transfer restrictions. ⁵⁶ A number of states have specific statutory provisions dealing with close corporations. These statutes usually state that they apply to [*1709] the following: (a) any corporation with no more than a specified, small number of shareholders and whose shares are subject to transfer restrictions, have not been publicly offered, and are not listed on a securities exchange; (b) any corporation that elects to be designated as a close corporation; (c) any corporation that so elects and also meets the statute's definitional criteria of a close corporation; and (d) any corporation that initially elects to be designated as a close corporation, as well as to pre-existing corporations who choose to be considered a close corporation prospectively as long as these pre-existing corporations satisfy certain statutory criteria. ⁵⁷ Many corporations that possess the characteristics of a close corporation nonetheless do not elect to be so designated ⁵⁸ and, therefore, are treated by law as general business corporations. Nonetheless, irrespective of the label applied to a corporation by state law, this Article will refer to it as a close corporation as long as it bears the typical characteristics of a close corporation. The mere fact that a corporation is or qualifies as a close corporation does not mean that the corporation is a financially small enterprise, as some close corporations have enormous assets.

Close corporations are almost always formed by small numbers of individuals who are actively and fundamentally involved in the businesses the corporations will pursue. Indeed, in many instances, the expertise, experience, or contacts of these persons are central to a close corporation's success. These persons may choose a corporate format primarily to enjoy limited personal liability. As a consequence, these key individuals or their close family members [*1710] may be the sole shareholders of the close corporation and may establish very restrictive conditions on the transferability of their shares. Thus, close corporations are profoundly different from public corporations in that, (1) their stock is not a highly liquid investment vehicle; and (2) there may, in fact, be no meaningful separation of control from beneficial ownership. As will be discussed in more detail in Parts V and VI, these distinctions between close corporations and public corporations could be of substantial Jewish law significance.

3. Professional corporations. Many states have enacted special statutes to enable professionals to incorporate and, thereby, to enjoy some or all of the advantages of limited liability for corporate debts. Nonetheless, whether, and if so to what extent, particular types of professionals are protected is limited by a number of factors. ⁵⁹ Individual statutes may either expressly exclude certain professions or provide that even if members of these professions incorporate, they nonetheless remain liable for certain categories of liability, such as those arising from their own malpractice, the malpractice of other professionals who are shareholders, and/or the malpractice of any other professionals under their supervision. ⁶⁰ Similar restrictions may arise as a result of ethical opinions or other rules promulgated by the state bodies that regulate individual professions. ⁶¹

Ownership of stock in professional corporations is virtually [*1711] always limited to the professionals who work or have worked for the corporation. Typically, the stock cannot be transferred to third parties, even if such persons happen to hold the same type of professional license. Consequently, just as with close corporation stock, stock in professional corporations is not a liquid form of investment.

Whether or not there is a meaningful dichotomy between control and beneficial ownership in a particular professional corporation depends on other specific facts about the professional corporation. If there are few shareholders, then one might expect that there would not be a large split between control and beneficial ownership. If, however, the professional corporation is a major law firm with hundreds of shareholders, it can be structured in such a way that the voices of very few shareholders are heard.

4. Analogous structures. Two common business forms bear similarity to corporations: limited partnerships ⁶² and limited liability companies. ⁶³ These organizations, [*1712] like corporations, are created in accordance with specific state statutes. These statutes confer limited liability upon limited partners and owners of interests in limited liability companies.

III. Secular Characterizations Regarding Corporations

Part III considers how secular law characterizes (1) a corporation, (2) the relationship between a corporation and its shareholders, and (3) the relationship between a corporation's directors and its shareholders.

A. Secular Characterization of a Corporation

In determining how secular law in fact characterizes a corporation, relevant factors might include the following: (1) the words and ideas used by academics, courts, lawyers, and legislatures to describe corporations; and (2) the actual rights or duties of corporations and their respective shareholders under common, statutory, or constitutional law. One of the problems that may arise, however, is that even within a single jurisdiction, ⁶⁴ corporations may be described and treated inconsistently. Corporations also may be treated in a manner inconsistent with the [*1713] way in which they are described. ⁶⁵ Moreover, one theory of a [*1714] corporation may be used for some purposes, or in specified circumstances, while a different theory may be used in other contexts. ⁶⁶ Furthermore, one particular corporation may be subject to various jurisdictions which follow contradictory theories. Despite these different factors, history reflects two principal ways to characterize a corporation: ⁶⁷ (1) as an independent entity, [*1715] separate and distinct from its shareholders or members (the entity theory); ⁶⁸ or (2) as the individual shareholders or members acting as a group (the aggregate theory).

In America, the dominant approach is to characterize a corporation as a discrete entity. ⁶⁹ Legislatures [*1719] frequently define the word "person" to include corporations, and when legislatures are silent, courts routinely construe the statutory, and sometimes even the constitutional, ⁷⁰ term "person" to include corporations. ⁷¹ The entity theory is consistent with the principal corporate characteristics described in Part II: limited liability, ⁷² [*1720] perpetual existence, and the easy transferability of shares. Similarly, consonant with this characterization, corporations hold property in their own name, they are entitled to sue in their own name ⁷³ (and should be sued in their own name ⁷⁴), they are entitled to assert federal diversity jurisdiction, ⁷⁵ they are usually taxed separately from their shareholders, ⁷⁶ they may be convicted of civil or criminal offenses, ⁷⁷ and although a person cannot enter into a contract with himself, corporations may contract with their own shareholders. ⁷⁸ By contrast, shareholders are not deemed to own a divided or undivided interest in particular pieces of corporate assets, ⁷⁹ they cannot individually exercise control or dominion over [*1721] corporate assets, ⁸⁰ they cannot bring suit in their names against corporate creditors, ⁸¹ they cannot bind the corporation to any undertaking, ⁸² and they cannot be disqualified as "interested executors" of an estate against which their corporation asserts a claim. ⁸³ Twentieth century statutory developments also apparently indicate acceptance of the entity theory by providing that directors can make decisions based on factors other than the immediate interests of the stockholders ⁸⁴ and, as discussed in Part III.C, by substantially depriving shareholders of an opportunity to meaningfully participate in corporate governance. ⁸⁵

B. Secular Characterization of the Relationship Between a Corporation and its Shareholders

Even though American law regards corporations as separate entities from their shareholders, commentators and courts commonly refer to shareholders as owners of the corporations in [*1722] which they hold their shares. ⁸⁶ If Jewish law were to perceive shareholders as owners of the corporation, then, even if corporations were regarded as separate entities, Jewish law might still consider corporate shareholders to be owners of the corporate assets. ⁸⁷ Under Jewish law, for instance, a slave is a discrete individual. Nonetheless, the property that a slave owns belongs to the slave's master. ⁸⁸ Theoretically, that which belongs to a corporation could be viewed as belonging to the corporation's owners, i.e., the shareholders.

In fact, however, secular law does not really seem to regard shareholders as the owners (ba'alim) of a corporation, as the term ba'alim is used in Jewish law. The English term "owner" is ambiguous ⁸⁹ and is often used imprecisely. For example, title to property is sometimes held in the name of one person (referred to as its "owner of record" or its "legal owner"), while the benefits of the property are supposed to inure to someone else (referred to as [*1723] its "beneficial" or "equitable owner"). By referring to shareholders as a corporation's owners, secular commentators and courts seem to mean no more than that the corporation is supposed to operate solely to benefit its shareholders. While the assertion that the corporation should advance the shareholders' interests, if true, would still be of Jewish law significance, it might fall far short of the halakhic concept of ownership (ba'alut) germane to particular Jewish law questions. Even more interesting, however, is that the assertion itself seems false, as we explain in Part III.C below.

C. Secular Characterization of the Relationship Between Corporate Directors and Shareholders

Because some Jewish law authorities heavily weigh a shareholder's ability to control a corporation when determining whether the shareholder is an owner of corporate assets, it is essential to explore the degree of control that shareholders enjoy. As a matter of practice, and to a surprising extent as a matter of black letter law, public corporations are largely controlled by their directors, not by their shareholders-especially not by shareholders with small investments. ⁹⁰ The inability of shareholders to control the corporation is especially important given that conflicts exist between the interests of shareholders and the interests of directors. ⁹¹

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Directors are not common law agents of shareholders. ⁹² The Restatement of Agency provides the following: (1) an agent is subject to the principal's control, ⁹³ (2) a principal has an unlimited right to terminate an agent at any time, ⁹⁴ and (3) the agency terminates automatically if the principal dies. ⁹⁵ These three principles also apply to the Jewish law of agency. ⁹⁶ Neither of these rules apply to the relationship between shareholders and directors. For instance, modern corporate law provides that a corporation's board of directors has original power, not authority delegated to them from shareholders, to manage the corporation. ⁹⁷ Thus, most decisions may be made directly by the board of directors, and only a few [*1725] require shareholder ratification. ⁹⁸ Similarly, shareholders are powerless to initiate many critical decisions, such as whether the corporation should amend its articles of incorporation, ⁹⁹ merge into another company, ¹⁰⁰ sell all of its assets, ¹⁰¹ or even dissolve. ¹⁰² These issues only can be addressed if the board acts first, which, of course, allows the board power to control a corporation's destiny. Nor can shareholders, at least in public corporations, issue binding instructions to the directors. ¹⁰³ The majority rule is that directors would breach their duties if they merely accepted orders from shareholders n104 ¹⁰⁴ (assuming the unlikely proposition, especially as to public corporations, that a large percentage of shareholders could effectively communicate with directors). ¹⁰⁵ Indeed, courts have actually held that boards of directors must make their own informed decisions with respect to certain matters and cannot merely allow the shareholders to vote on them. ¹⁰⁶

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Moreover, corporate law does not require that directors do what is in the best interests of a corporation's human shareholders. Daniel Greenwood argues that corporate law creates "fictional shareholders" based on "a set of legally defined interests that are not under the control of any individual or group of individual human beings who could choose to redefine or act in opposition to those interests." ¹⁰⁷ Human shareholders are individuals who have a wide variety of interests, not merely financial interests. Directors are not required to discern what the personal interests of the real life shareholders are. Instead, they are required to do no more than use their "business judgment" in promoting the pecuniary interest of profit maximization, the supposed interest of fictional shareholders. ¹⁰⁸

Greenwood's criticism, however, does not go far enough. Modern corporate constituency statutes, enacted in more than half of the states, ¹⁰⁹ do not even require that directors be bound by the objectives of fictional shareholders. Instead, such statutes speak in [*1727] terms of considering the best interests of the corporation. ¹¹⁰ The Illinois statute, for instance, states that "in considering the best short-term and long-term interests of the corporation," directors and officers may consider the effects that actions may have on "employees, suppliers and customers of the corporation or its subsidiaries, communities in which offices or other establishments of the corporation or its subsidiaries are located, and all other pertinent factors." ¹¹¹ These types of statutes obviously enable directors to take actions that are inconsistent with shareholders' financial interests, without any consideration of the percentage of shareholders who want short-run or long-run profits. ¹¹² It is not clear that these statutes were even designed to enable directors to promote the interests of fictional long-term shareholders who would be more concerned about the long-run than about the short-run. Thomas Bamonte, who examines the historical development of the Illinois statute, argues that it reflects both a rejection of the shareholder primacy concept altogether and an embracing of a "best interests of the corporation" test that considers a decision's impact on a wide variety of corporate constituencies. ¹¹³

Second, not only are shareholders unable to give binding instructions to directors, but a shareholder cannot terminate her relationship with corporate directors in the same way as a principal can end her relationship with an agent. ¹¹⁴ Under the common law, even if a principal enters into an agreement not to terminate the [*1728] agency or characterizes the agency as "irrevocable," she still has the power to terminate it; she merely runs the risk of liability for breach of contract. ¹¹⁵ Partnership law follows the same model. ¹¹⁶ Corporate law is different. Shareholders cannot abolish the board of directors. Corporate statutes, with limited exceptions, ¹¹⁷ provide that the corporation's business must be supervised by a board of directors. ¹¹⁸ Nor can the shareholders initiate a vote to dissolve the corporation. The board of directors must vote to approve dissolution before shareholders may vote. ¹¹⁹ Although dissolution may be accomplished without board action by unanimous written consent of a corporation's shareholders, obtaining such written consent is often virtually impossible, ¹²⁰ especially as to public corporations where there are numerous shareholders who do not know the other shareholders' names and addresses. Similarly, although under the Revised Model Business Corporation Act shareholders may seek judicial dissolution of the corporation, such relief is available on very limited grounds and, even then, is subject to the court's discretion. ¹²¹ Consequently, shareholders, to the [*1729] extent that they remain shareholders, are forced to maintain a relationship with the corporate board of directors.

Nor can shareholders immediately terminate their relationship with particular directors. ¹²² Directors are appointed or elected for a term, and their removal can only be accomplished pursuant to prescribed procedures. ¹²³ Some states only allow for the removal of a director for cause, especially if the corporation has a staggered board. ¹²⁴ Although many states authorize removal without cause, they usually require that specific time-consuming and potentially expensive procedures be followed. ¹²⁵ Furthermore, even if all of the shareholders were to die instantaneously, or to transfer their shares simultaneously, the directors would retain their positions. Ownership of the shares would pass to new persons in accordance with applicable state law, ¹²⁶ but the directors would remain in control of the corporation.

In addition to the absence of traditional agency principles, the director- shareholder relationship is substantially affected by a variety of statutory provisions that dilute shareholders' power. Directors gain control of commanding blocks of votes through the proxy solicitation; shareholders' ability to insert information or make proposals in this process is fundamentally curtailed. ¹²⁷ Prolific [*1730] state legislative enactments, marketed as antitakeover legislation, have even more severely attenuated shareholder influence on directors. ¹²⁸ Among the many types of takeover statutes are "business combination statutes" and "control share acquisition statutes." Business combination statutes place a moratorium on certain transactions between a target company and a shareholder who owns a specified percentage of stock, unless the target company's board of directors approved, in advance, either the transaction or the shareholder's acquisition of the stock. A common form of such a statute provides a moratorium of five years and is triggered by a holding of five percent of the corporation's stock. ¹²⁹ Control share acquisition statutes, enacted in one form or another by more than half of the states, usually prevent a person acquiring control shares from being able to vote these shares, unless a majority of disinterested shareholders vote to permit her to do so. ¹³⁰ Additional antitakeover statutes further restrict shareholders' ability to control directors. ¹³¹

The reality of the shareholder-director relationship can, but need not be, dramatically different in the context of a close corporation. Close corporations often have only a few shareholders who also serve as corporate directors, officers, or employees. Such shareholders often have significant influence in corporate governance. Thus, the de facto rights of shareholders in close corporations may be very similar to those of partners in a partnership. On the other hand, close corporations sometimes have minority shareholders who are at odds with those in control and [*1731] who are therefore, relatively powerless. ¹³²

IV. The "Special" Case of Corporations in Financial Distress

A considerable body of law regarding financially troubled corporations further limits the ability of shareholders to exercise control. In some cases, this dilution of shareholder control makes it even less likely that the shareholders will be regarded under Jewish law as owners of the corporate assets. Principally important are laws that (1) impose fiduciary responsibilities on corporate directors to consider the interests of corporate creditors, (2) permit the possible avoidance of certain corporate transfers or incurrences of debt, (3) involve a liquidation procedure pursuant to federal bankruptcy law, and (4) entail a reorganization pursuant to federal bankruptcy law. ¹³³

A. Corporate Directors' Duty to Consider the Interests of Corporate Creditors

The debtor-creditor relationship is essentially adversarial, not fiduciary. ¹³⁴ Thus, neither a corporation nor its directors typically [*1732] owes fiduciary responsibilities to corporate creditors. ¹³⁵ For example, corporate directors are ordinarily entitled to subject the corporation to financial risks even if the creditors would prefer more conservative conduct. ¹³⁶ Creditors, for the most part, are restricted to the rights afforded them by their agreements with the corporation, the right to pursue collection actions, and the right to initiate state or federal insolvency procedures.

A growing number of cases, however, have declared that as a corporation suffers financially and approaches or experiences insolvency, ¹³⁷ the corporation's directors begin to bear fiduciary responsibilities to corporate creditors. ¹³⁸ It is uncertain whether [*1733] these cases have, in fact, extended the law or merely applied expansive language to reach the same results that might have evolved under traditional standards. ¹³⁹ To the extent that corporate directors are deemed to owe fiduciary responsibilities to corporate creditors and are therefore limited in their ability to act in the best interests of corporate shareholders, the relationship between the [*1734] shareholders and the corporate assets is further diluted. As this relationship diminishes, the likelihood that Jewish law will not view shareholders as owners of the corporate assets increases. Nevertheless, one could still argue that the surviving relationship remains sufficiently strong enough to permit Jewish law to recognize shareholders as owners of the corporate property. ¹⁴⁰

B. Avoidance Laws

State and federal laws may call for the avoidance of certain transfers or incurrences of debt by a financially failing debtor. ¹⁴¹ These laws are designed to ensure that a debtor facing financial problems does not transfer or commit its assets in a manner that would defeat its creditors' expectations of reasonable corporate conduct. Thus, in many instances, a failing corporation's transfer of assets for less than reasonably equivalent value may be avoided for the benefit of corporate creditors. These rules, however, [*1735] represent relatively minor restrictions on a corporation's ordinary activities. The corporation may still use and consume its assets in the ordinary course of its business and may legally transfer property for reasonably equivalent value. ¹⁴² The avoidance laws apply to individual debtors as well as to corporations. ¹⁴³ The existence of such laws would undoubtedly not prevent a Jewish court from finding that an insolvent individual, and not his creditors, owns his personal assets. Similarly, a Jewish court would presumably find that a debtor corporation, and not its creditors, owns the corporate assets. Consequently, avoidance laws are unlikely to influence a determination as to whether corporate shareholders own a corporation's assets.

C. Federal Bankruptcy Liquidation

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Federal law provides for the following two basic types of bankruptcy proceedings: liquidations and reorganizations. Corporate liquidations are governed by Chapter 7 of the Bankruptcy Code. ¹⁴⁴ In a Chapter 7 bankruptcy, a trustee is appointed. ¹⁴⁵ All of a corporate debtor's property becomes [*1736] "property of the estate." ¹⁴⁶ The trustee's duties include being responsible for collecting and liquidating the property of the estate. ¹⁴⁷ The proceeds so obtained are distributed in accordance with the various provisions of the Bankruptcy Code. If a corporation is insolvent such that the value of its liquidated assets is less than the extent of its allowed debt, ¹⁴⁸ the corporate shareholders will not receive any part of these proceeds. ¹⁴⁹

The trustee cannot be controlled by corporate shareholders. To the extent that the trustee exercises control over the corporate assets, the relationship between the shareholders and those assets will be significantly diminished. On the other hand, the corporate debtor has the right, at any time, to convert the bankruptcy from a Chapter 7 proceeding to a Chapter 11 proceeding. ¹⁵⁰ In a Chapter 11 proceeding, the debtor's management may be able to retain control of the corporate assets. ¹⁵¹ Similarly, in Chapter 11, as explained in the following section, the shareholders generally have the right to meet and vote to make changes regarding corporate governance, such as to remove or replace directors. ¹⁵² It is uncertain [*1737] the extent to which the possibility of converting a case is significant in evaluating the relationship between shareholders and corporate assets while the corporation is in Chapter 7.

D. Federal Bankruptcy Reorganization

Even an insolvent corporation can initiate a bankruptcy reorganization proceeding pursuant to Chapter 11 of the Bankruptcy Code. Ordinarily, the debtor corporation continues to operate the business and control the corporate assets. ¹⁵³ Unless the court orders otherwise, shareholders can still attempt to exercise control over the directors. If a reorganization plan is confirmed, the corporation makes payments to creditors as set forth in the plan. The corporate assets are not sold or distributed to creditors. In such Chapter 11 reorganizations, the relationship between shareholders and corporate assets is not significantly affected. ¹⁵⁴

On the other hand, it is possible for a Chapter 11 trustee to be appointed. ¹⁵⁵ If appointed, the trustee can take control over the debtor's assets. ¹⁵⁶ Nevertheless, the trustee may still proceed to operate the corporation pursuant to a confirmed plan without liquidating the corporate assets. Consequently, even if a Chapter 11 trustee is appointed, the relationship between shareholders and corporate assets is not diminished to the same extent as in a Chapter 7 bankruptcy.

V. Evaluating Halakhic Perspectives of Corporations

Part V examines how corporations should be treated as a matter [*1738] of Jewish law by critically examining the principal approaches. The five chief theories are as follows: (1) the "halakhic entity" approach, (2) the "halakhic partnership" approach, (3) the "halakhic creditor" approach, (4) the "purchaser of entitlements" approach, and (5) the "relationship" approach. Part V.A will consider the first two approaches together because they represent some of the clearest contrasts.

A. The Halakhic Entity and Halakhic Partnership Approaches

1. Introduction

Under Jewish law, who is the owner of the property (i.e., the corporate assets) that secular law considers to be owned by a corporation? Before answering, it should be noted that the question implicitly assumes that someone does own these assets. After all, it is counter-intuitive to assume that this property is ownerless. Such an assumption would yield the unsettling consequence that anyone, even someone with no connection at all with the corporation, would be entitled to appear and take the property for herself. ¹⁵⁷ All of the Jewish law authorities who address this question adopt the position that the property has an owner.

The most obvious answer to the above question would be that just as secular law recognizes the corporation as the owner of the corporate assets, so does Jewish law. Indeed, this is the conclusion reached by the authorities who adopt the halakhic entity approach. [*1739] Because the shareholders are not the owners of the property, many Jewish law problems, such as those involving dough on Passover and lending on interest, would be avoided. Similarly, because the halakhic entity approach assumes that the corporation is a separate entity, any actions by corporate directors, officers, or employees would not be ascribed to the shareholders, thus avoiding other potential problems. ¹⁵⁸ According to this approach, the shareholders, by virtue of owning shares, would presumably be perceived as owning certain rights with respect to the corporation, the independent halakhic entity. ¹⁵⁹

Nevertheless, other commentators believe that under Jewish law, only human beings can own or acquire property. ¹⁶⁰ According to this opinion, if a corporation were regarded as an artificial legal entity separate and apart from its shareholders, ¹⁶¹ neither the [*1740] corporation nor its shareholders would own the property. Many of these authorities resolve this dilemma by declaring that under Jewish law a corporation is a partnership. ¹⁶²

According to the halakhic partnership perspective, all or some of the shareholders are partners and, as such, own a percentage interest in all of the corporate assets. ¹⁶³ Consequently, Jewish shareholders could be found liable for violating Jewish law if the corporation owns dough on Passover, operates on the Sabbath and on other Jewish holidays, charges interest for loans, and so on. According to the halakhic entity approach, which provides that shareholders do not own the corporate assets, these Jewish law problems would not arise.

2. The Analytical Basis of the Halakhic Entity Approach

Of critical importance to those who support the halakhic entity approach is the argument that corporations are qualitatively different from partnerships, such that corporate shareholders should not be deemed to be the owners of the corporation's property. Parts II and III reveal that some of these differences depend on the type of corporation considered-a public corporation or a close corporation-and these subtleties will be recognized when discussing specific hypotheticals in Part VI. Nevertheless, before introducing the analyses of individual proponents of the halakhic entity position, the basic differences between partnerships and public corporations should be summarized.

1. In a Jewish partnership, the partners are agents for each [*1741] other. In a public corporation, the shareholders are not agents for each other.

2. In a Jewish partnership, at least one of the partners has the authority to operate the business. In a corporation, none of the shareholders, as shareholders, are authorized to act on behalf of the corporation. They cannot bind the corporation, gain access to or use its assets, or assert the corporation's rights against third parties. Secular law provides that the corporation is a separate legal entity that owns its own property. It also vests authority for running the corporation in the board of directors. In fact, the shareholders have extremely limited control, legally and practically, directly and indirectly, over a public corporation's short-term and long-term operations. Among other things, the proxy system, antitakeover legislation, and corporate constituency statutes have essentially disenfranchised shareholders, especially those with relatively small holdings.

3. Under secular law, the directors of a corporation are not agents of the shareholders. The shareholders do not have the choice of doing without a board of directors. The shareholders cannot remove individual directors whenever they want; they must follow a statutorily prescribed procedure. Even if shareholders follow the required steps, they may be unable to remove directors unless they have legally sufficient "cause." They cannot give the directors binding instructions; indeed, the directors must exercise their independent judgment and are legally entitled to reject instructions from shareholders. The directors are expected to make their decisions in light of the best interests of the corporation, not in accordance with the best interests of the actual shareholders. Statutes expressly provide that directors can take into consideration the interests of other non-shareholder groups, such as employees and local communities.

4. The officers and employees of a corporation, inasmuch as they are selected and controlled (directly or indirectly) by the [*1742] corporate directors, are also not the shareholders' agents. Instead, they are the agents of the corporate entity.

5. Unlike a Jewish law partnership which automatically terminates on the death of one of the partners, a corporation does not terminate upon the death of one of its shareholders. In fact, a corporation would not automatically terminate even if all of its shareholders died at once.

6. Unlike a Jewish law partnership, in which partners may be personally liable to third parties for a variety of partnership debts, as a general rule corporate shareholders are not personally liable for corporate debts.

When some of a corporation's shareholders, directors, officers, or employees are not Jewish, an additional factor influences some authorities to conclude that a secular corporation is, under Jewish law, a new halakhic entity and not a full- fledged halakhic partnership. Jewish law generally ¹⁶⁴ provides that non- Jews cannot effectively act as agents for Jews and vice versa. ¹⁶⁵ To the extent that partners are supposed to be agents of one another, Jewish and non-Jewish [*1743] shareholders could not serve as each other's partners. ¹⁶⁶ [*1744] Similarly, to the extent that directors, officers, or employees are not Jewish, they could not be deemed under Jewish law to act on behalf of Jewish shareholders. ¹⁶⁷

Saul Weingart is one of the first Jewish law commentators to expressly advance the halakhic entity approach. ¹⁶⁸ Weingart considers the Jewish law prohibitions against a Jew owning dough during Passover and against a Jew benefitting after Passover from dough that another Jew illegally owned during Passover. ¹⁶⁹ He argues that because a corporation as a halakhic entity is not "Jewish," its ownership of dough during Passover does not violate Jewish law, and Jewish shareholders, as well as Jewish consumers, may benefit from the dough after Passover. ¹⁷⁰

[*1745]

Weingart supports the halakhic entity position in two ways. First, he attempts to portray it as reasonable by focusing on the dramatic differences between corporations and traditional partnerships. ¹⁷¹ He emphasizes not only the ways in which a shareholder's rights are restricted-by having no right to eat, sell, or destroy the corporation's dough or to use or even to enter the corporation's premises ¹⁷² -but also the fact that a shareholder enjoys unusual financial protection (namely that corporate creditors have no right to sue a shareholder to collect a corporate debt, even though they could ordinarily sue the partners of a debtor partnership). ¹⁷³ In addition, Weingart argues that two widespread practices can be justified only by treating corporations as halakhic entities. ¹⁷⁴ He asserts that rejection of the halakhic entity approach would mean that countless Jews would be violating Jewish law. ¹⁷⁵

The truth, however, is that the practices that bother Weingart, [*1746] at least as he presents them, do not really seem troublesome. Weingart refers to the following: (1) ownership of "paper" of the "government bank," and (2) ownership of governmental currency ("paper money"). ¹⁷⁶ He seems to argue that, but for the halakhic entity approach, one must conclude that anyone owning paper of the government bank owns a percentage of the assets of that bank, and that anyone owning government currency owns a percentage of the government's assets. ¹⁷⁷ Consequently, such a person likely violates Jewish law because during Passover the government bank and the government surely are involved in, and profit from, transactions involving dough. ¹⁷⁸ The weakness of his argument lies [*1747] in the fact that bank notes and paper currency seem to reflect debts, not ownership interests. Even if these commercial papers create or represent Jewish law liens on the debtor's assets, the liens would not apply to personalty. ¹⁷⁹ If the liens did apply to such dough, as long as the dough is not in the lienholder's possession, there would be no Jewish law violation. ¹⁸⁰

Weingart is substantially correct in differentiating the characteristics of a corporation from that of a traditional partnership. The difficulty is that he does not adduce adequate authority for the proposition that Jewish law would therefore treat a corporation as a separate halakhic entity.

Others offer more convincing support for the halakhic entity position. ¹⁸¹ For example, at least one decision of the Rabbinical Court of Israel also adopts the halakhic entity approach. ¹⁸² A cause of action had been alleged against corporate shareholders, and the court had to decide whether these shareholders or the corporation itself was the "real" defendant. ¹⁸³ Because the father of several of the shareholders had passed away, they were considered by Jewish law to be minor orphans. ¹⁸⁴ Jewish law provides that a court can entertain valid legal arguments on behalf of such orphans even if they or their legal representatives fail to raise the arguments themselves. ¹⁸⁵ The majority opinion concluded that the corporation is the real defendant, and therefore, the rule regarding orphans was irrelevant. ¹⁸⁶ As to corporations, the court broadly declared, [*1748]

A corporation is considered a legal person according to Jewish law as well. This has Jewish law relevance to such matters as corporate work on the Sabbath, lending on interest, ownership of hametz during Passover, and the like, as the responsibility of these actions does not reside with the owners of the shares. ¹⁸⁷

The Israeli Rabbinical Court justified the halakhic entity approach as follows: (1) by demonstrating that the concept of a corporation is indigenous to Jewish law; and (2) by arguing that even if the specific notion of a corporation were initially foreign to Jewish law, that concept can be incorporated into Jewish law through other indigenous Jewish law doctrines. ¹⁸⁸

a. Corporate Analogs in Jewish Law

The Israeli Rabbinical Court began by contending that the concept of a corporation is already embodied within traditional Jewish law through the concept of the "public" (tzibur). ¹⁸⁹ The court differentiated between a partnership, which is a conglomeration of persons in which each person retains his individuality and possesses a rich and complete form of ownership in partnership property, ¹⁹⁰ and the public, which is a separate legal entity in which persons do not retain their individuality (in general) or their individual ownership rights (in particular). ¹⁹¹ The court [*1749] argued that this distinction explains the dissimilar rules applicable to a voluntary sacrifice brought by a partnership and a voluntary sacrifice offered by the public. ¹⁹²

In addition to referring to other authorities who provide more extensive discussions of the distinction between a partnership and a community, ¹⁹³ the court cited a few examples. ¹⁹⁴ Citing Menachem Zemba, it explained that the distinction is apparent in the rules which apply to the mandatory Passover sacrifice. ¹⁹⁵ Such an offering is not allowed to be made if its owner still has dough in his possession. When a group of people bring a Passover sacrifice together, the people in the group do not lose their individuality. Consequently, if any one of the members in the group still has hametz, the sacrifice may not be offered. The Talmud explains Rabbi Yehuda's view that, on the day before Passover, the daily offering of the public also may not be brought if the public has hametz. Nonetheless, according to Zemba, Tosafot states ¹⁹⁶ that Rabbi Yehuda agrees that this offering of the public may be brought even if there is an individual among the public that still possesses hametz. ¹⁹⁷ The reason for this is that the public is a legal person that is considered as a whole; the fact that an individual [*1750] member of the public has hametz is insignificant. ¹⁹⁸

The court explained that a similarity between a partnership and the public is that the public, just as a corporation, enjoys perpetual existence. ¹⁹⁹ The Talmud states that "the public never dies." ²⁰⁰ Jewish law requires that an animal may only be sacrificed while its owner is alive; no atonement may be offered for individuals who have died. ²⁰¹ On the other hand, the Talmud declares that when a particular atonement is effectuated for the public, ²⁰² this atonement functions to achieve an atonement for the sins of the Jews who participated in the exodus from Egypt, even though that entire generation of Jews has long since died. ²⁰³ The current nation of Israel is not considered a separate public. Instead, the public is regarded as an ongoing entity that is more than, and different from, the sum of its individual parts and endures indefinitely. ²⁰⁴

Hayyim David Regensberg, who makes some of these same observations, also argues that this discrete concept of the public is supported by a Mishnah in the fifth chapter of the tractate "Vows" (Nedarim). ²⁰⁵ Jewish law generally permits a Jew, through a vow, to ban another from deriving any benefit from the first's person or property. The Mishnah provides the following: [*1751]

[If an individual says] "I am forbidden to you," the one to whom this is said is forbidden to derive benefit from the person or property of the one who spoke . . . . [If a person says] "I am forbidden to you and you are forbidden to me," both are prohibited from deriving benefit from the other. Both are permitted to derive benefit from the things that belonged to those who came up from Babylon. Both are prohibited from deriving benefit from things that belong to the particular city [in which the two people live]. ²⁰⁶

The Talmud explains that the things that belonged to the people that came up from Babylon include the Temple mount, the courts of the Temple, and the well on the road between Babylon and Israel. ²⁰⁷ Rabbi Solomon Yitzhahi (Rashi) explains that the reason why the two people may derive benefit from these things is that the Jews that came up from Babylon when Babylon allowed the Jews in exile to return to Israel "abandoned" these properties "to all Israel." ²⁰⁸ The phrase "all Israel" refers to the people of Israel as a public. Because these properties are owned by the public, no person possesses any individualized ownership interest in them. When a person derives benefit from this property, she does not derive benefit from other Jewish individuals but, instead, only from the public. It is for this reason that the two people mentioned in the Mishnah may continue to benefit from the properties of those that came up from Babylon, despite the vow that was taken.

Regensberg also suggests that Rabbi Yochanan ben Zachai endorses this view of the public as a legal entity in his dispute with Ben Buchri, ²⁰⁹ reported in the fourth Mishnah of the first chapter of tractate Shekalim. ²¹⁰ Rabbi Yochanan ben Zachai rules that Jews of [*1752] the priestly tribe (Kohanim), just as everyone else, are obligated to contribute money for the purchase of public offerings; Ben Buchri believes that Kohanim are under no such obligation. Rabbi Yochanan ben Zachai explains that the Kohanim believed that if they contributed money to the public funds used to buy offerings, the offerings purchased would be considered, at least in part, to be offerings "brought by a Kohain." But if the offerings were so considered, an inconsistency would arise among Biblical passages. ²¹¹ While one verse states that "[e]very flour-offering brought by a Kohain must be completely burned; it shall not be eaten," ²¹² other verses clearly require that Kohanim eat and not burn three types of flour offerings that are purchased with public funds. ²¹³ The Kohanim therefore argued that the only reason that these three types of flour- offerings were not deemed to have been "brought by a Kohain" was because the Kohain were exempt from contributing to the public fund; therefore, the Kohanim were permitted to eat these offerings.

Regensberg suggests that the Kohanim erroneously believed that, in making financial contributions for public offerings and thereby participating in the offerings that were brought, Jews retained their individuality and acted as partners in a partnership. Consequently, they would retain their identity as Kohanim, and the rules pertaining to the offerings of Kohanim would apply to their portion of the offerings, prohibiting them from eating the flour offerings. Rabbi Yochanan ben Zachai, however, argues that the tzibur is not merely a conglomeration of individuals but, instead, a separate legal entity. Thus, even if the Kohanim contribute funds for the three flour offerings brought by the tzibur, the offerings are [*1753] considered to be those of the tzibur as a whole and can be eaten. ²¹⁴ Rabbi Moses ben Maimon states that Jewish law is in accordance with Rabbi Yochanan ben Zachai. ²¹⁵

The Jewish law concept of the public arguably applies at certain sub-national levels as well. For example, the Jewish people are divided into tribes, and it is possible for a particular tribe to possess certain properties or intangible rights which are not owned by individual members of the tribe. Thus, the tribe of Levi is entitled to have its members receive certain contributions of food from other Jews, but no individual Levi has the right to demand any particular contribution. ²¹⁶

Similarly, there is a concept of the "tribe" of the poor. ²¹⁷ Each local community establishes a public charity fund ²¹⁸ in which money is held for the needy. The Talmud indicates that the money so collected is beneficially owned by the poor as a whole (as the tribe of the poor), and that those who collect such funds act on behalf of this community of the poor. ²¹⁹ Individual indigents have no standing to litigate matters on behalf of the public charity fund or to demand that the public charity fund make particular distributions. ²²⁰ The public charity fund could be characterized as a corporation that owns money for the tribe of the poor. Four hundred years ago, in the days of Rabbi Joseph Tranti (Maharit), the custom was to charge interest when lending monies from a fund, the principal of which was consecrated for charity. Tranti explains this custom by stating that the poor, for whose benefit the [*1754] money is held and used, are not really owners of the money. ²²¹ In this same vein, Rabbi Shimon Greenfeld (Maharshag) wrote that "I am almost ready to say that monies consecrated for the poor may be loaned on interest because they do not have 'known' owners." ²²²

The Holy Treasury, ²²³ the conceptual domain that owned and administered assets that were consecrated for use in connection with the Temple or Temple services, arguably constitutes another traditional analog to a corporation. ²²⁴ The Temple treasurer ²²⁵ participates in the acquisition and sale of the properties, ²²⁶ administers them, and represents the interests of the Treasury in any Jewish law litigation. ²²⁷ The Treasury and, to the extent that he superintends the property of the Treasury, the Treasurer, are exempt from many laws that govern individuals, including ritual and financial responsibilities. ²²⁸ Property that belongs to the Treasury is exempt from these rules because it is not considered to be property that belongs to another person as that phrase appears in the Bible. ²²⁹ Although the Talmud refers to these properties as money belonging to "the above" or "to the One who dwells above" [*1755] (i.e., God), ²³⁰ Regensberg suggests that this phrase may be intended merely to make it clear that the property does not belong to any individual. ²³¹

Regensberg states that by regarding the Holy Treasury as a halakhic entity, one can better understand the position taken by Tosafot and Rabbi Shimon ben Meir (Rashbam) that the Treasury cannot acquire property by a process known as "acquisitions made by one's yard." ²³² Jewish law recognizes that a normal person may ordinarily acquire property in two ways, by his own act or by the act of others. ²³³ Just as a person may actively pick up and acquire property with parts of his own body, such as his hand, the Sages say that in certain circumstances, one may acquire property that lands in his yard. In a sense, the yard that belongs to him acts as if it were his hand and can grasp otherwise ownerless objects that come within its boundaries. Regensberg reasons that because the Treasury, as an artificial or legal person and not a natural person, cannot act on its own to acquire property, ²³⁴ it cannot acquire property that lands in its yard either. Instead, the Treasury can only acquire property which someone else transfers to it. Regensberg thinks that Rabbi Moses ben Nachman (Ramban or Nahmanides), who disagrees and rules that the Treasury may acquire property through its yard, does so because this process operates even if the [*1756] owner of the yard is oblivious to what is happening. ²³⁵ Because the process does not require human thought or intention, ²³⁶ Nahmanides believes that it can work for an artificial legal entity even though that entity does not possess the faculty of human thought or intention. ²³⁷

Reminiscent of the sentiments of many secular theorists, ²³⁸ Regensberg argues that the notion of the public as more than merely a combination of individuals is a well-established "sociological reality." ²³⁹ The same argument can be used to argue that a partnership, which is also an association of people, constitutes a separate sociological reality. However, Regensberg contends that individuals have the choice of organizing in a way in which they maintain their individuality, as through a partnership, or in a way in which they lose their individuality and become part of a larger, different whole, as through a corporation. ²⁴⁰ Of course, even if one can generally distinguish between the sociological dynamics of public corporations and partnerships, it is difficult to argue that this distinction exists between close corporations and partnerships.

The Israeli Rabbinical Court cites tefisat habayit, loosely translated as a "decedent's estate," as another example of a "legal person" whereby two or more individuals enjoy beneficial rights in property but are not considered its owners. When an individual dies with two or more heirs, the inheritance is said to be held by the decedent's estate until it is divided among the heirs. When an individual owns animals, there is a requirement that some animals be set aside and given to members of the Jewish tribe of Levi. ²⁴¹ When partners own animals, no animals need to be set aside. While [*1757] an inheritance is owned by the decedent's estate, however, animals must be set aside. The Rabbinical Court maintains that this is because Jewish law treats the property as if it were owned by a special "legal person" rather than by the joint heirs. ²⁴²

Although opponents of the halakhic entity approach may not argue with all or even some of the descriptions of the above Jewish law concepts, they do deny that these concepts provide a precedent for recognizing a secular corporation as a separate halakhic entity. None of the above examples involve a voluntary association of individuals to promote their own personal financial gain. Rather, the examples merely represent naturally existing Jewish law institutions. The critics argue that new institutions cannot be created, especially by the voluntary actions of individuals intending their own personal gain. ²⁴³

The cogency of this argument is difficult to evaluate. There are no clear-cut rules as to how exact a paradigm must exist before concluding that the concept of a corporation exists in Jewish law. Perhaps the fact that the classical halakhic legal persons discussed above were not voluntarily created for the purpose of operating a business is insignificant. ²⁴⁴ On the other hand, it is arguable that some of these institutions, such as the charity fund, were voluntarily created. ²⁴⁵ Others, such as the decedent's estate, were typically used for generating private profit. Moreover, although the secular concept of a corporation appears to have arisen in connection with nonprofit institutions, the concept was thereafter [*1758] applied to commercial organizations. ²⁴⁶ To a large extent, the split of authority between proponents of the halakhic entity and halakhic partnership approaches seems to be based on whether or not the transition from nonprofit to profit organizations is perceived to be a natural one.

Opponents of the halakhic entity position also argue that a large number of Jewish law authorities have implicitly rejected it. They point to the substantial body of Jewish law literature discussing whether it is permissible to pay or charge interest when dealing with a banking corporation. They contend that, according to the halakhic entity theory, there should be no problem with levying interest. Nevertheless, many authorities found that there was a problem regarding interest. ²⁴⁷ Still others resolved the interest issue through rather complicated rationalizations. ²⁴⁸ According to the halakhic entity approach, these critics argue, the interest problem should have been a non-issue.

There are at least two partial responses to this criticism. First, there may be an historical explanation for this phenomenon, at least as to early Jewish law literature. As explained in Parts II and III, until relatively recently, secular law provided for a closer relationship between shareholders and their assets. Moreover, although English and American law adopted the corporate entity theory rather early, the aggregate theory retained considerably greater standing in Europe, where these responsa originated, for quite some time. In addition, shareholders of many corporations were not entitled to limited liability. Indeed, even the early responsa allowing investment in banking corporations that charge interest because of the restricted role of corporate shareholders, do not cite the principle of limited liability as a factor.

Second, a careful reading of responsa suggests that some important early authorities may have been advancing a version of [*1759] the halakhic entity theory. ²⁴⁹ Rabbi Isaac Aaron Ettinger, for instance, rules that there is no problem in being a shareholder in a banking corporation that loans on interest. ²⁵⁰ Among other things, Ettinger refers to the end of the Mishnah in Nedarim that was quoted above. The Mishnah provides that if a person vows that his fellow should derive no benefit from him and that he shall derive no benefit from his fellow, they are both prohibited from deriving benefit from things that belong to the city in which they both live. The Talmud explains that this refers to properties such as the public square, the bathhouse, the synagogue, the ark (in which the Torah [*1760] was kept), and the holy books. ²⁵¹ Rashi explains that the reason for this prohibition is that these properties are deemed to be owned by the citizens of the town in partnership. The Talmud explains that the two people mentioned in the Mishnah could permissibly derive benefit from the property if they would first transfer their ownership of the property to someone else, such as the political leader of the community. ²⁵² Once they no longer owned interests in this property, they could receive a benefit from the property without deriving a benefit from each other. Nonetheless, in addressing this solution, Nahmanides states that transferring the ownership interests in this way is a little like a trick. ²⁵³ With respect to the case of the bank, Ettinger states that all of the loans are made in the name of the bank and if the borrower does not want to pay, the malveh[ ²⁵⁴] [(i.e., the Jewish shareholder)] cannot assert any complaint; only the bank can bring suit in a Jewish court or in a Gentile court. In addition, the money belongs to the bank and this is better than [the case in Nedarim in which one] transfers his share to the political leader of the community because that [process] involves a bit of a trick, as . . . [Nahmanides] says [*1761] there, unlike our case [of the bank]. ²⁵⁵

The basic point this excerpt makes is that the bank, not the shareholders, owned the money that was lent. But if the bank were a partnership, then the shareholders' individualized interests in the partnership money would be problematic. By stating that the bank scenario was "better than" the solution mentioned in Nedarim, Ettinger implicitly seems to be stating that the bank was a separate legal entity and not merely a partnership. Later on, Ettinger makes a slightly different point when he argues that "[n]ever were any of them [(the shareholders or the bank directors)] made a lender or a borrower. Rather, the bank received the money [from its shareholders] and did business with it on the advice of its managers." ²⁵⁶

Opponents of the halakhic entity theory may also argue that some or all of the individual analogies are inapt in other ways. Thus, some contend that the public is really a partnership, not a corporate body. ²⁵⁷ They point out that, according to the Talmud, if a legal dispute arose involving assets of the public, none of the members of the public could serve as a judge or witness in the case because of bias. ²⁵⁸ Nevertheless, the merit of this contention is dubious for two reasons. First, bias could exist even if the members of the public are not partners or owners of the public's property; they could be biased simply because they have a beneficial interest in the public's assets. ²⁵⁹ Second, the testimonial disqualification [*1762] seems to have pertained to disputes involving property of the particular community, as to which the community members may have been considered a partnership, and not to property dedicated to the Jewish people as a whole, such as the property of those who came up from Babylon. The concept of the public that arguably embodies the notion of a corporation is that which refers to the Jewish people as a whole, on a tribe by tribe basis or as to the tribe of the poor, not one which refers merely to the people who live in a particular geographical area.

Another argument that critics of the halakhic entity theory employ is that corporate shareholders, if they were to act as a whole, could control the corporation's assets and indeed, could cause the corporation to dissolve and distribute the assets. They sometimes compare corporations to cases in which one could seek release from a vow. Due to the fact that such a person could obtain release from the vow, it is considered, for certain purposes, as if he had already been released. ²⁶⁰ Proponents of the halakhic entity theory might respond in two ways. First, in many instances, even if the shareholders would unanimously agree, they could not immediately dissolve the corporation. ²⁶¹ Second, they might argue that what could happen if there were unanimous agreement is irrelevant. The Talmudic references to someone obtaining release from a vow are inapt because such a release is, as a practical matter, almost surely within the individual's ability to obtain. By contrast, the agreement of other shareholders is certainly not within an individual's ability to procure. Indeed, merely obtaining the names and addresses of the other shareholders and communicating with them can be prohibitively costly. Of course, as discussed in Part V below, the critics' position is far stronger as to close corporations, especially those that are governed by a sole shareholder who serves as a sole director as well.

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b. The Creation of New Halakhic Rules

The Israeli Rabbinical Court observes that some, such as Yitzhak Wasserman, assert that if there is no halakhic precedent for the concept of a corporation, there is no way that this concept can be created through the use of traditional Jewish law rules. ²⁶² The court declares that the assertion is incorrect and argues that, even if there were no precedent for the halakhic entity approach, Jewish law doctrines would allow a court to treat a corporation as a halakhic entity. ²⁶³ The court cites the following four doctrines: (1) a rabbinical court may declare property ownerless (hefker beit din hefker), (2) conditions agreed to regarding monetary matters are valid (kol tenai shebimamon kayam), (3) commercial custom is binding (minhag hasohrim), and (4) the law of the secular government is religiously binding (dina de'malkhuta dina). ²⁶⁴

i. A Rabbinical Court May Declare Property Ownerless

Hefker beit din hefker authorizes a rabbinical court (beit din) to deprive a person of ownership of particular property. The Israeli Rabbinical Court asserts that this principle permits a rabbinical court to treat a corporation as a new halakhic entity. ²⁶⁵ The court apparently believes that this authority enables a rabbinical court to strip shareholders of their rights as owners and to transfer such rights to a corporation.

Although there is considerable disagreement as to this principle's precise parameters, ²⁶⁶ it is cited as a justification for promulgation of rabbinic rules affecting ownership. For example, there is a dispute as to whether the Torah recognizes the efficacy of liens. Aryeh Leib HaKohen Heller states that those who assert that liens are Biblically invalid do not distinguish between implicit or [*1764] explicit efforts to create liens. Accordingly, they believe that even though the Torah allows a person to sell her property, it does not allow her to transfer a lien because the Torah does not recognize "a partial transfer of ownership rights." ²⁶⁷ As the Rabbinical Court comments, this view perceives the creation of a lien as a type of unprecedented hybrid, a transfer of ownership rights that does not transfer ownership. ²⁶⁸ Nevertheless, even those who espouse this position admit that, at least as a matter of rabbinical law, liens are effective. The Israeli Rabbinical Court argues that just as a rabbinical court can introduce the concept of a voluntarily transferred lien into Jewish law, it can also introduce the secular concept of a corporation as a distinct entity. ²⁶⁹

Opponents of the halakhic entity approach raise at least two [*1765] objections. First, they argue that even if rabbinic authorities could implement the concept of a corporation into Jewish law, such authorities have not done so yet. ²⁷⁰ Second, critics can contend that the doctrine that allows rabbinical courts to declare property ownerless is not sufficiently robust as to permit introduction of this particular Jewish law innovation, the creation of an artificial halakhic entity. They contend that although the doctrine may permit a rabbinical court to deprive someone of her ownership rights, it cannot function to create ownership rights for someone or something (corporeal or incorporeal) that Jewish law does not otherwise give. ²⁷¹ Supporters of the halakhic entity approach can point out that there are authorities on both sides of the issue as to whether rabbinical courts may not only deprive one person of ownership but also create ownership rights for someone else. ²⁷² Except for the halakhic entity theorists themselves, no one seems to say that a rabbinical court can create ownership rights for someone who, under Biblical law, has no way of acquiring property.

ii. Validity of Conditions in Monetary Matters and the Importance of Commercial Custom

Jewish law provides that (1) any condition that is agreed upon with respect to monetary matters is valid under Jewish law; ²⁷³ and (2) customs established among merchants acquire Jewish law validity, ²⁷⁴ provided that the practices are not otherwise prohibited by Jewish law. These two precepts are arguably interrelated; commercial customs are sometimes said to be binding because business people implicitly agree to abide by them.

The Mishnah pronounces the validity of commercial customs. [*1766] Thus, the Mishnah states,

What is the rule concerning one who hires workers and orders them to arrive to work early or to stay late? In a location where the custom is to not to come early or stay late, the employer is not allowed to compel them [to do so] . . . . All such terms are governed by local custom. ²⁷⁵

The Shulhan Arukh makes it clear that common commercial practices override many Jewish law default rules that would otherwise govern a transaction. ²⁷⁶ Moreover, these customs are valid even if the majority of the business people who establish them are not Jewish. Rabbi Moshe Feinstein explains:

It is clear that these rules which depend on custom . . . need not be customs . . . established by Torah scholars or even by Jews. Even if these customs were established by Gentiles, if the Gentiles are a majority of the inhabitants of the city, Jewish law incorporates the custom. It is as if the parties conditioned their agreement in accordance with the custom of the city. ²⁷⁷

In addition, many authorities rule that such customs are valid under Jewish law even if they were established because the particular conduct in question was required by secular law. ²⁷⁸

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Nevertheless, just as authorities dispute whether the rule allowing rabbinical courts to declare property ownerless can introduce new Jewish law concepts, authorities debate whether commercial custom can substantially alter Jewish law. There are various customs as to how to "seal a deal." In some industries, it is said that a handshake is considered binding. These customs are referred to as situmta. It is agreed that situmta can make a kinyan, i.e., transfer title to property. This is true even though, but for the custom, the particular practice would not otherwise constitute a valid form of transferring title according to Jewish law. Thus, situmta can be used as a substitute for the normal procedures for achieving a kinyan. However, there is a classical controversy among Rishonim, Talmudic commentators who lived from 600 to 1000 years ago, as to whether situmta is effective to accomplish tasks that cannot normally be transacted according to Jewish law.

Rabbi Asher, Rabbi Shlomo Luria, and others argue that situmta can do more than traditional Jewish law forms of effecting a deal. For example, even though Jewish law has no native mechanism for transferring ownership of an item that does not now exist in the world, this approach argues that if the commercial practice of a particular society included a procedure for such transfers, Jewish law in that location would incorporate the practice as valid and enforceable. ²⁷⁹ For instance, no basic Jewish law form of kinyan permits someone to sell something that does not yet exist [*1768] or to sell to someone who does not yet exist. ²⁸⁰ Nevertheless, Rabbi Shlomo ben Aderet (Rashba) states, "Great is the power of the community, which triumphs even without a kinyan. . . . Even something which is not yet in existence can be sold to someone who does not yet exist [if community practice so provides]." ²⁸¹

If Aderet is correct and commercial custom can allow transactions to be accomplished that could not otherwise have been achieved under Jewish law, it is possible that the commercial custom of recognizing corporations as distinct entities that can own their own property and conduct their own business, albeit through agents, could also be introduced into Jewish law.

Critics of the halakhic entity theory, however, could raise at least three basic objections. First, they might try to distinguish between the relatively limited novelty of introducing the ability to transact business with a person, or a product, that does not yet exist into Jewish law, and the arguably much greater novelty of introducing the ability to transact business with a Jewish law entity which never has and never will "exist." Thus, some authorities [*1769] argue that the creation of a halakhic entity is like allowing property to acquire other property, something which cannot be done. ²⁸²

Second, unless commercial custom "gives life" to a corporation and allows it to actually acquire property, and not merely permit financial matters to proceed "as if" the corporation was a separate entity, commercial custom would not avoid many of the Jewish law problems that have been identified, such as the prohibitions against charging interest and owning dough over Passover. By contrast, if rabbinic authorities could and did use the principle allowing them to declare property ownerless to take property from shareholders and put it into the dominion of the corporation as a halakhic entity, these problems would not arise. Although the principle works directly only as to monetary matters, because the shareholders would no longer own the property, the rule allowing rabbinic courts to declare property ownerless would indirectly affect non-monetary Jewish law issues as well.

Third, critics argue that Rashba is wrong. Thus, Rabbenu Yeheil and others maintain that custom functions only as a substitute method by which title can be transferred, and cannot be more effective under Jewish law than the forms of kinyan recognized by the Talmud. According to this approach, if the concept of a corporation were foreign to Jewish law, use of situmta, a new method of accomplishing traditional transactions, could not introduce the corporate concept into Jewish law. ²⁸³

iii. "The Law of the Land" Incorporated into Jewish Law

(a) The Jewish Law Validity of Secular Law-As Applied to Jews The Jewish law doctrine that "the law of the land is the law" [*1770] provides that, in certain circumstances and for particular purposes, secular law is legally effective under Jewish law. In its opinion, the Israeli Rabbinical Court mentions this principle as another way through which secular legal concepts can be incorporated into Jewish law. A survey of the scope of the obligation to obey secular law is well beyond the scope of this Article. However, a brief review of the relevant theories is required. There are three principal perspectives regarding "the law of the land is the law."

1. Rabbi Joseph Karo ²⁸⁴ rules that secular law is binding under Jewish law only to the extent that it directly affects the government's financial interests. Thus, secular laws imposing taxes or tolls would be valid under Jewish law. ²⁸⁵

2. Rabbi Moshe Isserles agrees that secular laws directly affecting the government's financial interests are binding, but adds that secular laws which are enacted for the benefit of the people of the community as a whole are also, as a general matter, effective under Jewish law. ²⁸⁶

3. Rabbi Shabtai HaKohen disagrees with Rabbi Isserles in one respect. He believes that even if secular laws are enacted for the benefit of the community, they are not valid under Jewish law if they are specifically contrary to indigenous Jewish law precepts. ²⁸⁷ There is substantial debate among Jewish law authorities as to which approach to follow. ²⁸⁸ Nevertheless, it seems that most [*1771] modern authorities agree that, at least outside of the State of Israel, Rabbi Isserles' view should be applied. ²⁸⁹

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Of course, just as with respect to commercial custom, there is a question as to precisely what "the law of the land is the law" theory can accomplish. Some Jewish law decisions clearly rule that when this doctrine incorporates secular law into Jewish law, the incorporated secular law can accomplish things that previously would have been impossible under Jewish law. ²⁹⁰

For example, there is a Jewish law dispute as to the validity of a secular will. Conventional Jewish law rules do not allow transfer of a decedent's estate by will. Under Jewish law, once a person dies her property automatically transfers to her Jewish law heirs. Thus, the problem with a secular will is not just that no traditional method of transfer would work. The problem is that, according to [*1773] Jewish law, there is no decedent's estate from which to transfer funds. As a matter of Jewish law, all of the decedent's possessions are automatically and immediately transferred to the Jewish law heirs upon the decedent's death. Consequently, for the beneficiaries under the will to take possession of the decedent's property would, under Jewish law, be tantamount to taking property that was owned by the Jewish law heirs and would be prohibited as a form of theft. Nevertheless, there is a plethora of preeminent authorities who rule that this is not theft. ²⁹¹ Although not all of these authorities explicitly declare that "the law of the land is the law" can accomplish more than an ordinary Jewish law procedure, this proposition is at least implicit in their rulings. ²⁹² On the other hand, the authorities who disagree either explicitly or implicitly maintain that secular law cannot transfer property in a case where a traditional Jewish law procedure would be ineffective. ²⁹³ [*1774]

(b) The Jewish Law Validity of Secular Law-As Applied to Non-Jews

Before leaving this subject regarding the significance of secular law under Jewish law, it is important to note that the three principal approaches to "the law of the land is the law" described above dealt with the Jewish law validity of secular law as it applies directly to Jews. However, Jewish law also takes a position as to the validity of secular law in transactions between non-Jews.

Jewish law provides that non-Jews are bound to observe "the seven laws of Noah," referred to as the "Noahide Code." ²⁹⁴ In part, the Noahide Code requires non-Jews to establish a system of commercial laws. According to most Jewish law authorities, such laws may differ from the rules governing transactions that are conducted only between Jews. ²⁹⁵ Moreover, the majority view is [*1775] that, in a country governed by non-Jews, the secular law consequences of transactions among non-Jews is valid and can generally be relied upon by Jews. ²⁹⁶ For example, assume that A and B are not Jewish, and that A sells B a widget in a transaction that would not be effective under Jewish law ²⁹⁷ but is effective under [*1776] secular law. C, a Jew, can rely on secular law to establish that B owns the widget, and by purchasing it from B, C becomes its owner under Jewish law. Consequently, it seems likely that, as between non-Jews, secular law's view of a corporation as a distinct legal entity might well be effective as a matter of Jewish law. ²⁹⁸ Indeed, one of the Jewish law authorities that vigorously rejects the halakhic entity theory as applied to Jewish shareholders seems implicitly to acknowledge that it would apply to transactions among non-Jews. ²⁹⁹ Nonetheless, it is possible that opponents of the halakhic entity approach would argue that some parameters apply even as to the types of laws that can be created pursuant to the Noahide Code. Creating a theoretical entity, breathing life into it and allowing it to acquire and own property could, according to these critics, be beyond the pale.

iv. Creation of "New" Rules-Ownership and Limited Liability

Virtually all of the Jewish law issues that arise in connection with the characterization of a corporation involve, at least in part, the following two questions: (1) Is a Jewish shareholder an owner of the corporate assets?, and (2) Does the secular doctrine of limited liability apply to immunize Jewish shareholders from being personally liable for corporate debts?

As discussed, the halakhic entity and halakhic partnership approaches inevitably conflict as to the ownership issue. The halakhic partnership proponents, as well as proponents of the other positions considered below, deny that any apt analog to the [*1777] corporation exists in the Talmud. They also deny that any of the above-mentioned doctrines have the power to create this new halakhic entity.

Nevertheless, even critics of the halakhic entity approach have relatively little difficulty in concluding that corporate shareholders are entitled to the benefit of limited liability, ³⁰⁰ at least as to voluntary creditors (i.e., suppliers or purchasers who voluntarily transacted business with the corporation). Halakhic partnership theorists usually state that the partners, inter se, cannot demand from each other that they personally pay the business debts because it is as if the partners had agreed to the limited liability rule as a condition when they formed the partnership. As to third party creditors, some authorities specifically state that limited liability is justified either because any condition agreed to regarding monetary matters is valid or because commercial custom is binding. Such commentators point out that people in the business world realize that corporate shareholders will not be held personally liable, and it is on the basis of this understanding that they do business with corporations. ³⁰¹ Although a particular plaintiff may in fact not have [*1778] known the law of limited liability, she could and should have found out about it beforehand. Consequently, such a plaintiff is bound as if she had known the custom and had agreed to it. ³⁰² Other authorities argue that because a corporation is a creation of secular law, a person's financial rights when dealing with a corporation are limited to those set forth by the law. ³⁰³ Still others seem to assume that the limited liability rule would be valid under Jewish law without even discussing why. ³⁰⁴

The failure by some authorities to articulate precisely which Jewish law doctrine justifies the limited liability rule is problematic for two reasons. First, depending on which doctrine is used, it is possible that the rule would not apply to all possible claims. For instance, consider claims asserted by nonconsensual creditors, such as those that assert tort claims against the corporation. ³⁰⁵ If one believes that the limited liability rule is effective because it is as if those doing business with a corporation agreed to the rule-either because all conditions consented to regarding monetary matters are effective or because commercial custom is binding-then shareholders might not be entitled under Jewish law to limited liability against tort claims, such as a claim asserted by a pedestrian who was struck by the corporation's vehicle and who never agreed to do any business with the corporation. On the other hand, if one believes that the limited liability rule is effective under Jewish law [*1779] because rabbinical courts can declare property ownerless or "the law of the land is the law," the rule might operate as to tort claims as well. ³⁰⁶

Of course, if an individual shareholder personally committed the tort, he may not enjoy limited liability even as a matter of secular law. ³⁰⁷ Consequently, the only torts at issue are those based on the actions of third persons (such as vicarious liability for the actions of agents or employees), or based on injuries caused by the shareholder's property. Although a comprehensive analysis of Jewish tort law is beyond the purview of this Article, internal Jewish law rules, unlike secular laws, do not generally impose vicarious liability on principals for the tortious acts of their agents, whether the tortious conduct is purposeful or merely negligent. ³⁰⁹ [*1780] Consequently, the only way shareholders could be vicariously liable as a matter of Jewish law is because secular tort law is somehow incorporated into Jewish law. In such cases, it would seem likely that Jewish law would assimilate the secular limited liability rule as well. n309 Thus, as a practical matter, there is a difference between justifying the limited liability rule with the rules that all conditions agreed to regarding monetary matters are valid or that commercial custom is binding, on the one hand, and by justifying it with the rules that a rabbinical court may declare property to be ownerless or "the law of the land is the law," on the other. The difference involves cases in which the corporation's property caused injury, such as when a brick from the corporation's building falls on someone or a farming company's bull gores someone. ³¹⁰

Second, which doctrine is used to justify the limited liability rule may also affect the Jewish law rule as to consensual creditors in cases where secular law pierces the corporate veil. If the limited liability rule is based on "the law of the land is the law," one might suppose that wherever secular law imposes personal liability, halakhah would impose personal liability. On the other hand, if limited liability is based on the validity of consensual conditions or upon commercial custom, it is as if the shareholders and each consensual creditor agreed to the limited liability rule. What precisely constitutes commercial custom, however, requires a careful sociological analysis of people's expectations. As explained in Part II, the rules for piercing the corporate veil are unclear, and the holdings are inconsistent. Even assuming that specified circumstances are satisfied, courts retain substantial discretion as to [*1781] whether or not to pierce the corporate veil. It may be that the commercial custom, involving the expectations of the people who do business, is that corporate shareholders will enjoy limited liability. The unlikely possibility that a secular court could pierce the corporate veil in a particular case might not meaningfully affect such expectations. ³¹¹

Interestingly, an Israeli Rabbinical Court initially expressed doubt as to the limited liability process even as to voluntary creditors. ³¹² Possibly assuming that a corporation is a halakhic partnership and not a halakhic entity, this court described the rule by saying that shareholders give corporate creditors a lien in the assets of the corporation which serve as collateral without assuming any personal liability for the debt. ³¹³ The court stated that according to at least one interpretation of Rabbenu Asher's commentary, this type of transaction would be invalid according to [*1782] fundamental Jewish law rules. ³¹⁴ Those rules, according to Rabbenu Asher (Rosh), provide that a person's property can only serve as a guarantor that the person will pay her debt. However, if the person is not obligated to pay a debt, then there is nothing to guarantee, and nothing can be collected from the guarantor.

Asher's view is expressed in connection with the fol