Jewish Law and Modern Business Structures: The Corporate Paradigm
Michael J. Broyde & Steven H. Resnicoff
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
... 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. ...
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
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.
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
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
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
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
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
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.
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
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
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 following Talmudic discussion: "Rava states in the name of Rabbi Nahman: 'When a man proposes to a woman stating "Marry me with this mana [i.e., a specified sum of money,]" and he leaves her collateral instead of the mana, they are not married, as she has neither the money nor the collateral.'" 315 Under Jewish law, merely by sahing for which he is not obligated [(such as paying a mana to the woman mentioned in this passage)] cannot give rise to a valid lien on his property . . . [and the attempted betrothal is legally ineffective]. 316
The Israeli Rabbinical Court did not suggest that Asher's position would require finding the corporate shareholders to be personally liable. On the contrary, it assumed that the corporate shareholders would not be personally liable. It considered ruling that the corporate creditors could not even collect from the corporation itself because if the shareholders were not personally liable, the lien on the assets placed "in" the corporation would not be valid. 317 Nevertheless, the court concluded that even Asher would agree that the lien on the corporation's assets would be valid [*1783] because of commercial custom or "the law of the land is the law." 318
Thus, those authorities that support the halakhic partnership approach apparently must, if they want to rule in accordance with Asher, acknowledge that these doctrines can incorporate new rules into halakhah, even rules that would otherwise be inconsistent with halakhah. 319 But, once halakhic partnership theorists acknowledge that these doctrines can introduce new rules into Jewish law, including rules that would otherwise be directly inconsistent with Jewish law, it becomes easier for halakhic entity supporters to argue that these doctrines could similarly incorporate the corporate entity theory into Jewish law.
Halakhic partnership supporters could respond in several ways. First, they could rely on the approach of Nahmanides and Aderet who categorically disagree with Asher, explaining that there are technical reasons why advancing collateral for a debt that is not actually owed fails to effect a valid betrothal. Generally, however, they believe that one may create asset-based liability without incurring a personal obligation. 320 Many if not most Jewish law authorities appear to accept the approach of the Nahmanides and Aderet. 321 Second, they could argue that Rosh himself was only referring to a situation in which the owner of the collateral had not done anything to become financially obligated in any way. Halakhic partnership advocates might be able to differentiate that case from a situation in which corporate shareholders, through the [*1784] corporation, incurred some obligation by acquiring property sold by a corporate creditor. The corporate transaction could arguably be perceived as the creation of actual personal liability coupled with the corporate creditor's agreement that the shareholders need not personally pay for the liability. Of course, they could also, once again, attempt to distinguish the halakhic entity theory as being an allegedly more radical innovation, more fundamentally inconsistent with Jewish law than the limited liability rule. Nevertheless, if one assumes that the limited liability rule is, according to the Asher, inconsistent with traditional Jewish law, it is difficult to find a principled basis upon which to distinguish incorporation of the limited liability rule from assumption of the halakhic entity approach. Asserting that one rule is more radical than the other proves neither the assertion nor that any such asserted discrepancy is significant under Jewish law.
B. The Halakhic Creditor Approach
Not all Jewish law authorities characterize the corporation as either a halakhic entity or a halakhic partnership. Some authorities characterize the relationship between Jewish shareholders, or some types of Jewish shareholders, and the corporation as that of a creditor to a borrower. For instance, Rabbi Moshe Sternbuch believes that Jewish law, even after considering the various doctrines described above, does not recognize a corporation as a halakhic entity. 322 Sternbuch argues that if Jews constitute the essential part of a corporation's shareholders, 323 the corporation could be characterized under Jewish law as a partnership subject to certain conditions, such as limited liability, agreed to by the partners. 324 He contends that Jewish law could "force" the [*1785] transaction to be construed in this manner even though the shareholders really intended only to become stockholders in a secular corporate entity. 325
Sternbuch implies that the shareholders have not really agreed to the conditions he specifies but that Jewish law somehow forces them to be treated as if they had. He much more clearly implies that there is some difference between the rights and duties of shareholders under secular law and the rights and duties of Jewish law partners, even assuming the partners had agreed to the various conditions he describes. 326 This implication renders his version of the halakhic partnership theory somewhat troublesome.
If, however, non-Jews constitute the essential part of the investors, Sternbuch argues that the non-Jewish shareholders have the right to be shareholders of a corporate entity and that Jewish law cannot make them partners in a partnership. 327 Consequently, [*1786] Sternbuch states that if a Jew tries to purchase stock in such a corporation, the money he pays constitutes a loan to the "managers of the corporation." 328 According to Sternbuch, if the enterprise succeeds, it is proper under Jewish law for the Jewish shareholder/lender to take the profits that are distributed to him by the corporate managers. 329 On the other hand, if the corporation fails and the Jewish shareholder/lender has not recovered the principal of the "loan" that he made, then according to Jewish law, the shareholder/lender would really be able to collect the unpaid principal from the corporate managers. 330
There are several noteworthy aspects to this approach. First, it is interesting that even though neither the Jewish shareholder nor the corporate managers intend for there to be a loan, Sternbuch states that Jewish law would treat it as a loan. It is unclear who Sternbuch means when he refers to the corporate managers. Perhaps he means the people who received the Jewish investor's payment for the stock. 331 These managers thought they were acting on behalf of the corporate entity. However, according to Sternbuch, they were not acting on behalf of the corporate entity because Jewish law does not recognize that any such corporate entity exists. Consequently, if these managers were not acting on behalf of the corporate entity, they must be deemed to have acted for themselves. By taking a Jewish investor's money without giving anything in exchange, the corporate managers are deemed under halakhah to have borrowed the money. 332
If the corporate managers are Jews, then according to Sternbuch, if the company fails, it seems that they face possible personal liability, enforceable in a rabbinic court, to repay the amount that was paid to them by the Jewish investors. 333 If the corporation succeeds and the Jewish investors are paid more than their principal, it is possible that the transaction would violate a rabbinic rule against collecting interest. 334
Second, Sternbuch's explanation seems to presuppose that the Jewish shareholders bought their stock from the corporation. It is unclear what Sternbuch's position would be in the very common case in which a Jewish investor purchased shares from an existing shareholder. Consider, for instance, a Jewish investor who purchases shares from a non-Jewish shareholder. The non-Jewish shareholder was not considered a creditor of the corporate managers, and the corporate managers had no personal liability to him. Indeed, according to Sternbuch, it seems that as far as non-Jews are concerned, the corporation is a secular legal entity, and a non-Jewish shareholder has certain rights, as a shareholder, against [*1788] the corporation. 335 When a Jewish investor purchases the non-Jew's shares, none of the purchase money goes to the corporation or to the corporate managers. Consequently, both the corporation and the corporate managers could not be found to have directly borrowed money from the Jewish investor.
Furthermore, even assuming the Jewish investor could acquire the rights previously held by the non-Jewish shareholder, the Jewish investor would not be deemed to have loaned money to anyone because the non-Jewish shareholder had not loaned money to anyone. This seems to leave two possibilities. One is that the Jewish investor actually acquires his predecessor's status as a corporate shareholder, and in this scenario, Sternbuch would approve of the halakhic entity theory. 336 Yet this occurrence is common, and Sternbuch provides no explicit basis for believing that he would approve the halakhic entity theory at all! The other possibility is that the Jewish investor could not acquire the non-Jewish shareholder's rights, and the attempted purchase of shares would be ineffective. Consequently, the money paid to the non-Jewish shareholder would constitute a loan from the Jewish investor to the non-Jewish shareholder who received it. Thus, the Jewish investor would have no claim against the corporation but would have a claim as a creditor against the shareholder from whom he had attempted to buy the shares. Similarly, the non-Jewish shareholder would owe money to the Jewish investor and would really still own the corporate stock under Jewish law.
Another creditor-oriented approach is advanced by Rabbi Yitzhak Yaakov Weiss. Interestingly, Weiss believes that the corporation is a halakhic partnership with respect to Jewish [*1789] shareholders who own voting shares, even if as a practical matter such shareholders have no meaningful ability to influence corporate conduct. As a result, any Jew with voting shares would be deemed to own a percentage of the corporate assets. If the assets consisted of dough, then according to Weiss, the Jewish shareholder would face the prohibition of owning dough on Passover. 337
On theip and those who say it is always a partnership. 340
Critics of Weiss' position argue that the distinction between voting and nonvoting shares is not defensible. 341 The distinction seems to be based on form, not substance, because a nonvoting shareholder with a large investment in a corporation might, in fact, have a much greater ability to influence a corporation's conduct than a voting shareholder who owns very few shares. Another difficulty with Weiss' approach is that he fails to explain, when [*1790] there is a loan, to whom the loan is made. Would he, for instance, agree with Sternbuch and rule that the loan is made to the corporate managers? Or would Weiss believe that the loan is made to the partnership consisting of the shareholders holding voting stock? As was evident when discussing Sternbuch's position, there could be Jewish law consequences arising from such a loan, and therefore, it is critical to know to whom it is made.
Part V.A.2.a explained that a responsum of Ettinger regarding charging interest could be interpreted as supporting the halakhic entity analysis. Citing a different responsum of Ettinger, Weiss contends that Ettinger follows the creditor approach. 342 Nevertheless, a close reading of that responsum does not provide any specific support for Weiss' interpretation. Although Ettinger states that Jewish shareholders do not own corporate property, he does not say that the Jewish shareholders loaned any money to anyone.
Ettinger considers the case of a corporation, some of whose shareholders are Jewish, that had owned a large supply of beer (a form of hametz) throughout Passover. Specifically, he ponders whether the corporation's Jewish shareholders are allowed to derive benefit from this beer. He answers that the Sages prohibited such products to penalize Jews who failed to fulfill their responsibility to destroy hametz prior to Passover. 343 He reasons that, inasmuch as Jewish shareholders have no right to use, sell, or destroy the corporation's property, they had no halakhic obligation to destroy the beer in question prior to Passover. Therefore, he writes that the penalty enacted by the Sages would not apply. 344 In addition, he argues that the Jewish shareholders were not obligated to sell their stock prior to Passover. 345 He acknowledges that the value of the beer was linked to the financial interests of the shareholders (in halakhic terms, that the shareholders are aharoi for [*1791] the beer) and that if the beer had been destroyed, the shareholders would suffer a loss. Nevertheless, he states that the Jewish shareholders did not own the beer itself (the guf hahametz) because, as he explains, they had no right to consume, sell, or destroy it, and they had no right, as shareholders, to enter or use the corporation's premises. 346 As a result, he declares the case is like that of a Jew who is aharoi for hametz of a non-Jew that is in the possession of the non- Jew, in which case the hametz is not prohibited after Passover.
It is possible to construe this responsum in the same way that Ettinger's responsum regarding the charging of interest was interpreted in Part V.A above, i.e., that the corporation is considered as if it were a separate halakhic entity that owned the hametz. 347 Alternatively, it is possible to construe it in either of the following ways: (1) as supposing that the Jewish shareholder merely purchased a right to a portion of the corporation's profits, similar to the view discussed in Part V.C; or (2) as evaluating the overall relationship of the Jewish shareholder to the dough, similar to some of the views described in Part V.D. 348 Nowhere in the responsum does the Maharyah Ha-Levi state that the Jewish investors loaned money to anyone. If he thought that Jewish investors had loaned their money, it would have been necessary for him to explain to whom the loan was made and to describe the consequences if the borrowers were Jews.
Of course, the halakhic creditor approach shares the problem mentioned above in connection with Sternbuch's halakhic partnership analysis. A Jewish investor does not seem to be lending money to corporate managers. He does not perceive himself as a [*1792] lender, but as an investor. A Jewish investor who purchases corporate shares from a non-Jewish shareholder surely does not perceive himself as lending money to the non- Jewish shareholder. To say that this is what is happening is to push a square peg into a round whole with both hands. In addition, this characterization obviously conflicts with applicable secular law.
C. The Purchaser of Entitlements Approach
Rabbi Moshe Feinstein discusses the Jewish law status of corporations in a number of scattered responsa. In several responsa, he briefly indicates that a corporation is not a new type of entity and refers to it as a partnership. 349 Nevertheless, it seems possible that in at least some of these responsa, he is referring to close corporations. 350 On the other hand, in another responsum, he specifically discusses the widespread practice of purchasing stock in public companies that do business on the Sabbath. He states that the simple reason that this practice is permissible under Jewish law is that someone who purchases shares of a company but does not really have a meaningful say in the company's business should not be considered even as a pro rata owner. Nor does such a purchaser of shares want to be an owner of the business or to purchase any of the business. Instead, he wants to purchase part of the profits and losses that the business will have according to the shares that he buys.
. . . [In fact] it seems more reasonable to say that he does not make any Jewish law acquisition, but only acquires [*1793] [rights to the profits and losses] according to the laws of the land. That, according to the condition on which he made his purchase, a shareholder can vote to elect the president [of the corporation] is . . . [devoid of any practical significance], because, in fact, they [(presumably meaning those who control the corporation)] keep for themselves more than a majority of the shares so that the purchaser cannot effectively influence [the corporation's conduct. 351] Nor does this purchaser desire to influence [the corporation's conduct] and does not intend to acquire such a right. . . . But it certainly is prohibited for one to acquire so much stock that his opinion will be considered [by those who control the corporation] even in non-Jewish factories or businesses[,] . . . [unless] one makes the type of conditional agreement required when a Jew enters into a partnership with a non-Jew as set forth in Shulhan Arukh, Orah Hayyim, no. 345. 352
Thus, Feinstein believes that individual investors who are not involved in a corporation's operations, who do not own a sufficiently large percentage of shares as to enable them in fact to control the corporation's business, and who have no intention of obtaining such control, seem to acquire no more than an interest in the corporation's profits. 353 Pursuant to ordinary Jewish law rules, the acquisition of rights in future profits and losses might be difficult or impossible to accomplish because such profits and losses are "things" that "do not exist." 354 This seems to be the reason why Feinstein suggests that the acquisition is pursuant to the principle [*1794] of "the law of the land is the law." Thus, unlike Weiss, Feinstein does not look to the formal distinction between voting and nonvoting stock, but to the substantive distinction between shareholders who can or intend to influence the corporation's conduct and those who merely want to purchase a part of the corporation's profits and losses.
Neither Ettinger's responsum cited by Weiss and discussed above in Part V.B, nor the responsa of Rabbi Shlomo Kluger, Rabbi Azreil Hildesheimer, or Rabbi David Zvi Hoffman, discussed in Part V.D, are necessarily inconsistent with Feinstein's approach. They emphasize that Jewish shareholders do not own the corporate property directly and that all they have is a right to the corporate profits. Although they do not explain the Jewish law process or processes through which these shareholders acquired the right to corporate profits, they could theoretically agree that the right was purchased through "the law of the land is the law." 355
There are, however, several difficulties and ambiguities with respect to Feinstein's approach. Feinstein mentions two relevant factors: the investor's intent to purchase a right to influence corporate conduct and the investor's ability to do so. 356 First, it is uncertain whether both of these factors are necessary before there is a problem requiring "the type of conditional agreement . . . required when a Jew enters into a partnership with a non-Jew as set forth in Shulhan Arukh, Orah Hayyim, no. 345" 357 or whether either factor would be sufficient. For example, assume an investor purchased stock with the intent to try to influence corporate conduct-by way of rallying other shareholders and trying to add shareholder resolutions to the proxy materials distributed by management-but was unsuccessful in these efforts. Given that the shareholder owned some stock and tried to change [*1795] corporate conduct, would he be considered a "partner" in the corporation, or must he actually obtain enough power to impact corporate governance?
Incidentally, assuming that the possession of a certain measure of corporate influence is required before someone is regarded as an owner of corporate assets, how much power is enough? Weiss seems to say that a single share of voting stock is sufficient. Feinstein clearly disagrees and says that ownership of a small number of shares is not sufficient. Instead, he says that the problem of ownership arises when one acquires "so much stock that his opinion will be considered [by those who control the corporation]." 358 ut what does it mean for an opinion to be considered? What if a minority shareholder attends stockholder meetings and even sits on the board of directors but is always outvoted? Is the mere fact that the minority shareholder voices his view significant?
Not only is it unclear whether meaningful power is absolutely necessary, but, assuming someone has real voting power, it is uncertain whether such power is sufficient to make the shareholder an owner. Assume a particular shareholder has such a sufficiently large holding that she could affect corporate governance but she simply has no interest in doing so. 359 Would Feinstein rule that this [*1796] person is an owner?
ion, from whom are they acquiring a right to a share of the corporation's profits and losses? Moreover, precisely who does own the corporate property? If there are certain shareholders who own a significant portion of the stock and, individually or jointly, are able to control the corporation, perhaps Feinstein would characterize them as the real partners in this "corporate partnership." But what if no individual, or group of individuals, owns a significant percentage of shares? Who would own the corporate property? If the corporate directors themselves owned some shares and also exercised control through manipulation of the proxy system, would Feinstein characterize the corporation as a partnership comprised of such directors? If so, what degree of ownership interest would each such director possess? 360
An additional difficulty arises because of Feinstein's focus on a person's intent at the time he purchases his shares. Consider a few examples. Assume that there are 100,000 shareholders, each of whom owns 1 share of the corporation's 100,000 total shares of stock. 361 Because none of these shareholders purchased the stock with the intent to take an active role in corporate governance, Feinstein would presumably consider them merely as purchasers of entitlements from the corporation and not as partners who owned any interest in the corporate property. 362 But suppose a new person, A, decided that this corporation was undervalued and wanted to obtain control of it. A then purchases the shares of stock owned by 50,001 of the corporate shareholders and, with this majority interest, is able to elect the corporate directors and direct corporate conduct. 363 According to Feinstein, is A an owner of the corporate assets? But from whom could A have acquired an interest in the corporate property? A merely purchased shares from the existing shareholders and, according to Feinstein's approach, those existing shareholders did not own interests in the corporate property.
Changing the hypothetical a little, assume that A had originally purchased from the corporation 50,001 of the corporation's 100,000 shares of stock with the intention of being actively involved in [*1798] running the corporation, such that Feinstein would deem A to be a partner with an ownership interest in the corporate property. Assume that A then dies and that his stock is inherited by many different people, none of whom has the intent to be active in corporate affairs or has enough shares to be successful in influencing corporate affairs even if she so desired. Are these inheritors nonetheless considered owners of a pro rata share of A's original ownership interest in the corporate assets because they inherited it? If not, what happens to A's ownership interest?
The difficulty posed by these last examples seems to be based on the traditional concept of linking ownership with the possession of legal title. 364 Thus, in the first case, if the 50,001 individual shareholders owning one share apiece did not own title to the corporate property, someone who simply purchases their rights does not seem to have acquired title at all; there was no one who could have transferred title to that someone. Similarly, in the second case, if a shareholder who does own title passes away, it would seem that the title he owned would be inherited.
Maybe Feinstein believes that a person who acquires a small amount or percentage of corporate stock acquires the following two things: a right to share in the profits and an option, of unlimited duration, to acquire an ownership interest in the corporate property. No technical act would be required for the shareholder to exercise this option. She merely would have to formulate the intent to acquire the relevant ownership interest. 365
This explanation is somewhat troublesome. First, Feinstein does [*1799] not mention anything about an option. Second, neither the purchasers nor the sellers of corporate stock mention such an option when they transfer ownership of the stock. 366 Third, until the new purchaser of the stock decides to exercise the ownership interests attendant to the stock, who, if anyone, enjoys those interests? For example, assume a majority shareholder, who presumably possesses ownership interests commensurate with her shareholdings, sells some of her shares to a new minority shareholder. Does the seller retain the ownership interests attendant to the shares sold until and unless the new minority shareholder exercises his option? Even if this were the case, what if the majority shareholder sells all of his stock to a number of new minority shareholders? In light of the fact that the seller no longer owns any stock, it seems impossible to say that the seller retains the applicable ownership interests. Do these interests exist in limbo until the new shareholders decide that they want to be owners? Does the right to ownership interests attach to the stock and blink on and off based on the holder's desires?
Alternatively, perhaps Feinstein implicitly suggests a new concept of ownership that does not require possession of legal title. Perhaps he believes that control with beneficial interest can constitute a form of ownership. Nonetheless, it remains unclear what the authority is for such a proposition, what degree of control is required, and what degree of beneficial interest is required.
Neither of the above alternative explanations answers who, according to Feinstein, would be the owner of the corporate assets if no shareholder had significant control over the corporation. Nor do these alternatives grapple with the fact that, even if a particular shareholder possesses some ability to influence the corporation, secular law prescribes that the corporate directors, who may be more powerful than the shareholder, are not the shareholder's agents but the agents of the corporate entity.
D. The Relationship Approach
The final approach to corporations reflected in Jewish law literature does not explicitly address what a corporation is, but instead, identifies the unusually attenuated relationship between Jewish shareholders and a particular corporation and relies on the nature of this relationship in reaching specific Jewish law conclusions. Thus, some authorities argue that the fact that a shareholder is not personally liable for a corporation's debt permits the corporation to pay interest on a loan from individual Jews. 367 Similarly, others contend that the prohibition against doing business with forbidden foods poses no problem for Jewish shareholders as long as they are not personally involved in a corporation's business. 368
The relationship approach is yet another way of understanding the responsum of Ettinger discussed in Part V.B, above. After examining all of the restrictions confronting shareholders, Ettinger states that the relationship between the shareholders and the corporation's dough is like that between a Jew and the dough of a non-Jew in the non-Jew's possession, for which a Jew is financially responsible. Perhaps Ettinger is not saying that the two cases are factually identical. Maybe he is merely stating that the extremely limited connection between the Jewish shareholder and the dough owned by the corporation is so attenuated that under Jewish law, it should be treated the same as the dough of a non-Jew in the non-Jew's possession, for which a Jew has a financial interest.
Similarly, when asked about the propriety of owning shares in a corporation that did business with dough over Passover, Shlomo Kluger stated,
The custom of people with shares in . . . corporations . . . is that they just have only a part of the profit or loss. They do [*1801] not have any right to direct or manage the operations of the business [or] the sales and purchases necessary for the business . . . . Therefore, . . . [a Jewish shareholder] has no obligation to sell [his shares before Passover]. 369
Thus, without naming the Jewish law doctrine he is relying on, Kluger uses the limited relationship between the shareholder and the corporate dough in ruling that stock ownership is not a problem with respect to Passover. Adopting this same approach, Rabbi Hanoh Dov Padua cites the Ettinger and Kluger responsa. 370
Azriel Hildesheimer, as cited by David Hoffman, permits Jewish shareholders to derive benefit after Passover from dough owned by their corporations during Passover because, in part, the shareholders did not own any part of the dough; and even if they would have asked the directors for dough in return for their shares, the directors could have refused to give any. 371 Hildesheimer does not explain who did own the dough during Passover. But he focuses on the shareholders' inability to demand the dough as a reason for saying that they were not responsible for it. Hoffman, although questioning other arguments raised by Hildesheimer, treats this contention favorably. 372
Thus, Ettinger (at least in his responsum regarding a corporation that owned beer throughout Passover), Kluger, Padua, Hildesheimer, and Hoffman all focus on the relationship between the Jewish shareholder and the corporation's assets, but do not expressly explain either who did own such assets or which precise Jewish law doctrine formed the basis for their rulings.
Ezra Batzri, a contemporary redactor of Jewish law clearly [*1802] familiar with secular corporation theory, writes at length about evaluating the precise relationship between Jewish shareholders and corporate property. 373 His argument echoes that of secular scholars who refer to ownership as a bundle of rights and contends that one might be the owner for certain purposes but not for other purposes. 374 Thus, Batzri argues that although the limited liability rule might seem to prevent a shareholder from being an owner of corporate property, there are a number of legal threads that nonetheless tie shareholders to the property. 375 He argues that the theoretical ability of secular law to pierce the corporate veil and find shareholders personally liable for corporate debts is one such thread. Nonetheless, he specifically refuses to reach any conclusions as to whether the threads linking a shareholder to corporate property are, in fact, sufficiently strong so as to consider the shareholder the Jewish law owner of such property. 376
One might argue that as to a public corporation, where the likelihood of piercing the corporate veil is almost nil, the theoretical possibility of this event is too slender to meaningfully connect shareholders as owners of the corporation. The probability of piercing the corporate shell, however, is much more likely in a close corporation.
VI. Summary and Hypotheticals
This Part examines how the various Jewish law approaches would apply to issues regarding financial liability and issues arising out of ownership of corporate property.
A. Shareholders' Financial Liability for Corporate Debts
The issue of a shareholder's personal financial liability for [*1803] corporate debts can be separated from the somewhat more complicated issues regarding the status of a corporate shareholder as a possible owner of corporate property. Secular law generally permits the corporate shell to protect shareholders from being personally liable for corporate debts. This is usually true as to all debts of public corporations, close corporations, and nonprofit corporations, and at least as to those liabilities of professional corporations and limited liability companies that are unrelated to the professional malpractice of someone in the business. Similar statutory protection is ordinarily afforded to the limited partners of limited liability partnerships. Virtually all of the Jewish law approaches surveyed in this Article agree, although for different reasons, that this secular doctrine of limited liability is generally valid under Jewish law.
Although a rigorous discussion of the exceptions to this general rule would overstep the bounds of this Article, there are three basic provisos that at least should be mentioned. First, the limited liability doctrine does not protect individual shareholders (or directors, officers, or employees) from liability for their own tortious or illegal conduct. This exception would be unlikely to arise in connection with the many shareholders of a public corporation because it is rare that such shareholders are personally involved in the corporation's business. On the other hand, shareholders are often involved in close corporations and may be found personally liable if, for instance, they are guilty of defrauding corporate creditors. 377
the shareholder legally responsible. For example, secular law might find someone vicariously liable for a tort or crime while Jewish law would not. In such cases, there may be a difference of opinion as to whether or not Jewish law will incorporate the secular rules and impose [*1804] financial liability.
Second, in specific lawsuits, secular law may pierce the corporate veil and impose personal liability on corporate shareholders. 378 Such shareholder liability may result from application of general common law principles or, as to professional corporations or limited liability companies, from particularized statutory or regulatory body rules. Whether a particular Jewish law authority would similarly impose such personal liability may depend on the doctrine that the authority uses to incorporate secular law's limited liability rule into Jewish law. Thus, those who justify the limited liability rule based on "the law of the land is the law" might believe that the rule regarding piercing the corporate veil is part and parcel of the law of the land. On the other hand, an authority who justifies limited liability because of commercial custom might, in some cases, disagree. 379
Third, it is possible that some Jewish law authorities would not apply the limited liability rule to certain cases involving a corporation's nonconsensual creditors. If the basis for incorporating the limited liability rule into Jewish law depends on commercial custom, then the rule may be incorporated only as to consensual relationships. On the other hand, if the reason for incorporating the rule is that "the law of the land is the law," the rule could apply even as to nonconsensual creditors.
B. Ownership Interests in Corporate Property
The Jewish law literature is not sufficiently developed to determine, in all conceivable scenarios, whether the diverse approaches would regard shareholders as owners of the corporate property. Nonetheless, it is worthwhile to explore at least a few categories of cases.
1. Public Corporations
Cases involving a public corporation such as IBM and AT&T-one whose shares are traded publicly and are probably owned by a large number of shareholders living across the country or world-can be divided into four basic classes.
a. A Nonvoting Shareholder Who Does Not Have a Significant Say in Corporate Governance
A nonvoting shareholder in a public corporation would not be a partner in the corporation and would not be an owner of any part of the corporate assets under the halakhic entity approach, the purchaser of entitlements approach, 380 Weiss' version of the halakhic creditor approach, 381 and probably by those applying the relationship test. Thus, these views would agree that such a Jewish shareholder would generally have no problem with respect to interest charged or paid by the corporation, dough owned by the corporation on Passover, business conducted by the corporation on Jewish holidays or in violation of particularized Jewish law rules, and lawsuits litigated by the corporation in secular courts rather than rabbinical courts. The halakhic creditor approach of Sternbuch would similarly avoid most of these Jewish law issues. 382
Klein would presumably hold that even a nonvoting [*1806] shareholder would be a partner and all of the aforementioned Jewish law issues would have to be examined. Some of them might be resolvable on other grounds. 383
b. A Nonvoting Shareholder Who Does Have a Significant Say in Corporate Governance
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. Sternbuch's halakhic creditor approach would similarly avoid most of these Jewish law issues.
Feinstein's position is considerably less clear. On the one hand, he seems to follow substance and not form. Consequently, he might find that, as long as a nonvoting shareholder has the power to affect corporate conduct, the nonvoting shareholder intended to and did acquire a partnership interest in the corporation. Those applying the relationship test might reach the same conclusion. The problem is that Feinstein's position and/or the position of one or more of the supporters of the relationship test could depend on the precise type of influence the nonvoting shareholder has. Consider examples of three different types of influence. First, a nonvoting shareholder may in some circumstances have specific legal options (spelled out in the documents pursuant to which the shares were issued) in the event of certain corporate developments. These options might include the power to oust one or more corporate directors through a shareholder vote. This sort of formal, legal power, particularly if the factual conditions have already been satisfied and the options have ripened, may be significant under Jewish law. Second, a nonvoting shareholder could also be a director, officer, or employee of the corporation, and therefore possess certain formal, discretionary authority with respect to the corporation. Of course, [*1807] secular legal principles would limit such a shareholder's right to use this authority for her personal benefit. It is less clear whether this type of influence would be significant under Jewish law. Third, a particular shareholder may informally possess influence because of the nature of the personal relationship that exists between ter. Nonetheless, it is possible that this supposed influence would be too flimsy to be meaningful to Feinstein and/or those applying the relationship test. 384 Finally, of course, Klein would apply the halakhic partnership approach.
c. A Voting Shareholder Who Does Not Have a Significant Voice in Corporate Governance
Neither the halakhic entity approach nor the purchaser of entitlements approach would find that the voting shareholder who does not have a significant voice in corporate governance was a partner in the corporation or that he owned any part of the corporate assets. 385 The relationship approach would probably reach the same conclusion. Assuming that not all of the shareholders were Jews, Sternbuch would continue to rule that the Jewish shareholder had only loaned money to the corporate managers. Nonetheless, Weiss would join Klein in applying the halakhic partnership approach, irrespective of how little influence the particular shareholder actually had in corporate governance.
d. A Voting Shareholder Who Does Have a Significant Voice in Corporate Governance
In the case of a voting shareholder with a significant voice in [*1808] corporate governance, the halakhic entity approach would find that the shareholder was not a partner and did not own any part of the corporate property. The halakhic creditor approach of Sternbuch would similarly avoid most of these Jewish law issues. Weiss would join Klein in applying a halakhic partnership analysis.
The views of Feinstein 386 and those following the relationship test are less certain. If significant influence arises from ownership of the shares alone, these authorities would probably rule that the shareholder owned an interest in the corporate assets. As already mentioned, it is difficult to predict how Feinstein would consider less formal types of control.
2. Close Corporations
Close corporations present a much more complicated problem than public corporations. Close corporations are usually formed by a few people who are actively involved in the corporate business. The corporate format is often employed for the purpose of obtaining limited liability. Shareholders in close corporations are much more likely than those in public corporations to (1) own a significant percentage of the corporation's voting stock; (2) serve as a director, officer, and/or employee of the corporation; and (3) have personal and/or familial relationships with a number of other shareholders who own a significant percentage of the corporation's voting stock. On the other hand, it is also possible for individuals to be shareholders without any personal involvement in the business. Sometimes even minors inherit close corporation stock or acquire it by gift. Similarly, it is possible for someone to be a relatively powerless minority shareholder in a close corporation. Indeed, it is possible for there to be no single shareholder or coalition of shareholders that have the power to control the corporate conduct. Thus, these numerous variables make it difficult [*1809] to issue generalizations regarding close corporations.
a. A Nonvoting Shareholder Who Does Not Have a Significant Say in Corporate Governance
Only one authority, a single decision of the Israeli Rabbinical Court, has specifically endorsed the halakhic entity rule in the context of a close corporation. 387 That decision seemed to rule that even a close corporation would, for all apparent purposes, be deemed a separate halakhic entity. 388 According to this approach, if a Jewish baker decided to form a corporation in which he served as the sole shareholder, director, officer, and employee, the corporation could keep dough on the corporation's premises throughout Passover without the baker violating Jewish law. Similarly, this Israeli Rabbinical Court opinion could allow the baker to have his bakery, lend money to Jews, and charge interest, assuming that such lending operations were secularly authorized for the bakery corporation. 389
Such a result, however, seems radical. Indeed, Weiss suggests that it is unthinkable. 390 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. Both Weingart and Regensberg, the only others who expressly endorse the halakhic entity approach, emphasize in great detail the fact that corporate shareholders have no control over or even permission to use the corporation's assets. Indeed, Regensberg [*1810] even uses sociology to explain the conceptual difference between the dynamics of an association of persons as a partnership and the dynamics of their association as a corporate community. 391 Consequently, neither Weingart nor Regensberg would be logically forcedto apply the halakhic entity theory to a close corporation. Nonetheless, either or both might adopt the halakhic entity approach with respect to particular close corporations; they simply provide no guidance as to how they would rule.
But even Weiss' position is arguably unclear. He states that it would be inconceivable for someone to be able to keep dough during Passover simply because he incorporated his business. 392 On the other hand, although Weiss declares a clear distinction between voting and nonvoting shareholders, he does not explicitly state an additional, unequivocal distinction between close corporations and public corporations. In fact, if he had wanted to discriminate between small corporations in which shareholders would always be deemed to be partners and other corporations in which only voting shareholders were partners, he should have described the distinguishing characteristics of these two categories of corporations. For example, he might have focused on the total number of shareholders, on whether the shareholders were all members of one family, on whether the shareholders were all Jews, and on whether the shareholders were all actively involved in the corporate business. But Weiss provides no such rules. Consequently, it may well be that the only distinction he really makes is between voting and nonvoting shares. He could nonetheless condemn the bakery example if the Jewish shareholder owned voting shares.
Sternbuch's approach would presumably still depend on whether or not Jews constitute an essential part of the shareholders. If they are Jewish, then he would agree with Klein that the corporation is to be treated as a partnership. If non-Jews represent the essential part of the shareholders, then he would continue to say [*1811] that the Jewish shareholders had loaned their money to the corporate managers. In the case of a close corporation, however, some of these managers may be Jewish, raising a serious question regarding the payment of interest. 393
Feinstein's position is also uncertain. As mentioned in Part V, in a pair of cases he seems to characterize close corporations as being no different from partnerships. However, the responsa do not indicate precisely why. It is possible that he was only taking this position with respect to a person who not only was going to be a shareholder of the close corporation, but also was going to be actively involved in the corporate business. Consequently, it might be that Feinstein would rule that even a shareholder of a close corporation would merely own a share of the corporate profits and losses if (1) the shareholder is not personally involved in the corporate business, and (2) the shareholder has no significant influence over the corporation's conduct. The conclusion reached by the relationship approach would probably depend on the same two factors.
b. A Nonvoting Shareholder Who Does Have a Significant Say in Corporate Governance
The Israeli Rabbinical Court would still apply the halakhic entity theory, and Klein would still apply the partnership theory to a nonvoting shareholder not significantly involved in corporate governance. Sternbuch's position would presumably still depend on whether or not most of the shareholders are Jewish. It becomes more likely, however, that Weingart, Regensberg, Feinstein, or those following the relationship test would also characterize this shareholder as a partner. However, as discussed in connection with public corporations, the views of particular authorities might be affected by the type of influence this nonvoting shareholder has. If Weiss only distinguishes between voting and nonvoting stock, he would have to find that a nonvoting shareholder, even with a [*1812] significant say in corporate governance, is a creditor who loaned money and not a partner who purchased a partnership interest.
c. A Voting Shareholder Who Does Not Have a Significant Voice in Corporate Governance
The Israeli Rabbinical Court would still apply the halakhic entity theory, and Klein would still apply the partnership theory to a voting shareholder who did not have a significant say in corporate governance. Sternbuch's position presumably still would depend on whether or not most of the shareholders are Jewish.
It is not clear whether Weingart, Regensberg, Feinstein, or those following the relationship test are more likely to treat a voting shareholder without significant influence as a partner or to treat a nonvoting shareholder with significant influence as a partner. Again, it might depend on the type of influence the nonvoting shareholder has. Weiss, however, would treat a voting shareholder as a partner.
d. A Voting Shareholder Who Does Have a Significant Voice in Corporate Governance
The Israeli Rabbinical Court would still apply the halakhic entity theory to a voting shareholder with a significant voice in corporate governance. Klein and Weiss would apply the partnership approach. Nevertheless, this is most likely the case regarding close corporations in which Weingart or Regensberg would disagree with the halakhic entity theory. It also seems likely that Feinstein and those applying the relationship test would disagree on treating the shareholder as a partner. Sternbuch's position would presumably still depend on whether or not most of the shareholders are Jewish.
3. Professional Corporations and Limited Liability Companies
The pure halakhic entity theory propounded by the Israeli Rabbinical Court would presumably find that a professional [*1813] corporation, whether large or small, would constitute a separate halakhic entity. Similarly, the pure partnership approach of Klein would presumably find that every professional corporation constituted a partnership. What the other Jewish law approaches would conclude would depend on additional circumstances.
If the professional corporation has many shareholders, one would expect that the various Jewish law views would mirror those set forth in Part VI.B.1. If the professional corporation has few shareholders, one would expect the views to parallel those described above in Part VI.B.2.
A factor that arises in connection with professional corporations, however, is that the shareholders are almost always liable for some or all of the corporate debts arising out of the professional malpractice of professionals employed by the corporation. As Batzri might say, this liability represents an additional thread connecting the shareholders to the corporation and might increase the likelihood that some authorities, such as those following the relationship approach, would be more likely to characterize the shareholders as partners.
Limited liability companies are basically designed by secular law to accomplish the same objectives as professional corporations, while permitting treatment as partners for tax purposes. It therefore seems likely that Jewish law views would perceive limited liability companies in much the same way as they would professional corporations. It seems unlikely that the type of tax treatment that is afforded would play much of a role.
4. Nonprofit Corporations
Nonprofit corporations do not have shareholders. They can have voting and nonvoting members. Although nonprofit corporations can engage in commercial activities which produce a profit, this profit cannot be distributed to corporate members. Consequently, there are two obvious ways in which an individual may derive personal benefit from nonprofit corporations: (1) he may be paid as a director, officer, employee, or as an independent [*1814] contractor, or he may cause his friends or relatives to be paid in one or more of these capacities; and (2) he may utilize his influence over the corporation to ensure that corporate funds are used for persons or projects that are dear to his heart.
These types of benefits can be significant. At least one secular commentator has argued that the value of control over a nonprofit corporation should be considered when equitably distributing a family's assets in divorce proceedings. Nevertheless, no Jewish law authority seems to have addressed the significance of this type of benefit, and there seems little basis to predict how they would rule.
Secular corporation law covers numerous categories of organizations: profit and nonprofit, public and close. The realities of corporate governance may differ greatly even from one corporation to another within a particular category. Some shareholders own voting stock, while others have only nonvoting stock. Some shareholders are personally involved in the corporation's business and others are not. Some shareholders attempt to affect corporate conduct and others do not. Some shareholders have the ability to affect corporate decisions, even if they do not exercise this ability, while others lack even the potential to impact corporate behavior. Some corporations have primarily Jewish shareholders and others do not.
None of the Jewish law theories of a corporation is entirely satisfying or compelling. Perhaps the reason is that these efforts, for the most part, are insufficiently sensitive to the many different types of secular corporations. Assuming, for example, that the halakhic entity approach were correct across the board, it would enable the use of a corporate form to resolve countless Jewish law difficulties. The dilemma is that it might resolve too many problems. It would theoretically enable Boruch the Baker to form a corporation of which he is the sole shareholder, director, and officer. It would also allow the corporation not only to keep dough throughout Passover, but, if he hires non-Jewish bakers and [*1815] salespersons, to sell dough throughout Passover as well as on the Sabbath and other Jewish holidays. Although it is possible that secular law creates the opportunity to use a corporation to circumvent Jewish law, this is an unsettling conclusion. While many of the arguments asserted in favor of the halakhic entity approach focus on notions regarding the attenuated relationship between shareholders and corporate assets, these arguments do not apply to many close corporations where the substantive relationship is much richer and dynamic than the formal relationship. Nevertheless, no one yet has articulated a consistent set of easily applicable principles that would distinguish between scenarios in which the halakhic entity approach should and should not apply.
While the halakhic entity approach might seem in some instances to permit what should be impermissible under Jewish law, the halakhic partnership approach has the opposite defect. By treating all shareholders as partners-no matter how insignificant their numbers of shares, how inactive they are in corporate affairs, and how unlike their status is to that of traditional partners-the partnership approach prohibits certain forms of conduct, particularly regarding public corporations, which do not appear as if they should be prohibited under Jewish law.
* * * *
Where does Jewish law go from here? Legal systems, including religious legal traditions, must at some point move from the theoretical to the practical and must provide guidance to its adherents and practitioners. How should one who is faithful to Jewish law treat corporations and ownership of corporate stock? 394
In times of yore, the Jewish legal tradition had a sanhedrin, a supreme court, which resolved Jewish law disputes by majority vote. 395 The majority determined what the halakhah actually was, [*1816] and the losers were left to defend the correctness of their Jewish law theory in the study hall, with little practical impact. The institution of the sanhedrin, however, ceased to function over 1500 years ago, and since that time, Jewish law has not had a formal mechanism to definitively resolve halakhic disagreements among its most prominent authorities.
Thus, one might assume that in light of the lack of any formal procedure for resolving disputes, Jewish law disagreements would persist indefinitely. However, such an assumption would be largely inaccurate. In fact, Jewish law authorities have, over time, achieved consensus on a wide range of issues, in part through the publication of their analyses both in responsa literature as well as in Jewish law journals. Indeed, most matters have been and continue to be resolved through such informal processes. 396
Most matters are so resolved, but not all. Certain issues, because of their intense intricacy, the attractiveness of alternative arguments, the apparent absence of clearly applicable precedent, or a combination of these or other factors, remain unresolved; no clear consensus develops. In such circumstances, Jewish law resorts to second-tier rules that govern cases of legal uncertainty. An example of a Jewish law "uncertainty principle" is that while conduct that might possibly (but does not clearly) violate a Torah prohibition is usually proscribed, conduct that might possibly (but does not clearly) violate a rabbinic ban is frequently permitted. Doubt may be raised not only by virtue of certain types of factual uncertainties, but by diverse opinions regarding the legal rule itself. Consequently, in particular scenarios described in Part VI where substantial authority would find that shareholders do not own corporate property, Jewish law, at least with respect to rabbinic [*1817] prohibitions, may yield a lenient ruling.
For example, consider a public corporation with some Jewish shareholders who, although they own voting stock, have no real influence on how the corporation operates. This corporation owned beer during Passover, and the question is whether after Passover, a Jewish consumer is permitted to purchase some of the beer. The prohibition on a Jewish consumer's use of beer that some other Jew may have owned on Passover is rabbinic in nature. Consequently, one may be able to rely on the many views that hold that in this type of situation, the Jewish shareholders would not be considered to have owned the beer during Passover.
However, if there are more than one sufficiently substantial, independent grounds for believing that a prohibition is inapplicable, Jewish law may permit conduct even when a Biblical ban is at stake. 397 Although a generalized discussion of the intricate and unique manner in which Jewish law copes with institutional jurisprudential doubt would exceed the scope of this Article, a few brief comments can be made. In evaluating whether a particular Jewish law proscription applies to a given factual scenario, there may be two or more facts, each of which would render conduct permissible according to some Jewish law authorities. As opposed to some legal systems in which minority views carry virtually no formal weight, Jewish law recognizes that substantial minority views, especially when combined in particular cases or when added to other considerations, may result in a lenient ruling.
In the above example, for instance, consider the Jewish shareholders themselves. Owning beer during Passover would violate Biblical law. Did they violate this law when they failed to divest themselves of their stock prior to Passover? Rabbi David Tzvi Hoffmann considers this issue and resolves it leniently even though he reaches no overall conclusion as to how Jewish law treats a corporation. Instead, he combines no fewer than nine distinctly independent grounds to support his ruling that a Jew need not sell [*1818] his shares in a corporation that owns hametz during Passover when a majority of the owners are non-Jews and the Jewish shareholder has no meaningful say in the management of the corporation. 398 Indeed, he comes to this conclusion as a matter of normative Jewish law, even as he is uncertain how to view a corporation.
The question that cannot be answered in theory, can in fact be answered in practice. Such is the mission of a system of law.
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