The Halachic Definition of a Share in a Limited Liability Company Regarding the Sale of Chametz

It is common for a person to own a share in a limited liability company [a company with limited liability] that holds chametz which is not sold to a non-Jew. This involves the Torah prohibition of bal yera’eh and bal yimatzeh — that chametz not be seen or found in one’s possession — and the positive commandment of tashbitu, to eliminate chametz. In addition, there is the rabbinic prohibition of chametz that remained in one’s possession over Pesach. Sometimes the company itself does not hold chametz, but it owns a share in another company, and that company owns another company, until eventually it reaches a company that does hold chametz. One must discuss the law and the definition of ownership of the shareholder: is he considered an actual partner, with the members of the board of directors and the CEO acting as his agents to manage the company, so that all prohibitions that exist in the company, insofar as they exist, apply to him as well? Or perhaps, since the company becomes a separate legal entity, the shareholder has no share in the company’s partnership, and consequently the prohibitions do not apply to him.

Clarifying the concepts of “company” and “share”

More than 200 years ago, it was decided throughout the world, by broad consensus [apart from a few isolated places that did not accept this idea], to establish a new concept called a limited liability company . The need for this was to create a business enterprise composed of many partners and investors, without needing, for every decision, to gather all the partners and require their consent for each and every decision.

For this purpose, a limited liability company was established, meaning a “separate legal entity” from its members [- the owners of the company], independent of the physical existence of the company’s owners. The company can borrow and lend, sell and purchase, conduct business on its own behalf, sue and be sued, rent out and lease, employ workers and provide services. The assets of the company belong to the company itself [and not to the shareholders]. If the company borrowed money, only the company’s assets are encumbered to the loan, and everything is as though it were an independent human address.

There are many additional differences in the definition of a company around the world, but we will relate to the matter according to Israeli law. In many cases, the entrepreneurs who establish the company grant every investor a right and a share in the company, called a share . Of course, generally the founders of the company retain for themselves more than 51% [a majority] of the company’s shares, so that they can determine all the company’s affairs. They increase the financial capital needed for investment by selling shares beyond the percentage they need in order to retain a majority, while maintaining their power in management and control. [There are also other types of shares, bonds, banks in Israel and abroad, provident funds and the like; in this article we will not enter into explaining the differences between them].

Defining the owners in a limited liability company

From a halachic perspective, one must discuss who is considered the owner. A person’s ownership of property is expressed in three matters: a. the profit from the property; b. the right to decide how the property is used; c. the right to transfer or sell it to another person.

In a limited liability company, these rights are divided among three factors: the shareholders, the members of the board of directors, and the management. The shareholders are the holders of the monetary rights in the company, and they receive dividends from the company’s profits during its activity, as well as ownership of the company’s capital in the event it is dissolved. The day-to-day management of the company is under the exclusive authority of the management. The directors have the authority to appoint the management, which determines the general policy of the company and its methods of operation, including the sale of assets. However, the decision to dissolve the company is vested only in the shareholders.

In principle, the legal personality of the company is distinct and separate even if the company has only one shareholder. For example, a person named “Avraham Levi” could open a limited liability company called “Avraham Levi Ltd.”, and then the company is a legal personality separate and distinct from him personally, and the company’s obligations do not obligate him personally in any way.

Another important point should be noted: a limited liability company differs from ordinary ownership in that the shareholders and the directors have no personal responsibility for the company’s debts. [Except that there are certain cases in which courts pierce the corporate veil and also relate to the owners personally; that is a very complex subject in its own right].

The halachic problems that may arise for shareholders

Over the years since this concept was invented, the poskim have discussed the laws and prohibitions that result from it. The main questions discussed concern chametz on Pesach, matters of Shabbat, commerce in prohibited items, lending with interest [this is a topic about which, with God’s help, we will write a separate article], and other prohibitions. In this article we will focus on the prohibition of chametz on Pesach: whether shareholders in companies, or companies that hold shares in other companies which own chametz, are considered owners of the chametz and transgress the prohibition of bal yera’eh and bal yimatzeh on Pesach.

The view of the Acharonim that the ownership of shareholders is limited and they are not considered owners with regard to prohibitions

The Maharam Shik (Yoreh De’ah, siman 158) and Maharia Halevi (Intiga, vol. 2, 124) discussed permitting the holding of shares in a company that, in its business activity, transgresses Torah prohibitions. This is because they maintain that the ownership of shareholders is limited, since they have no way to act except through the CEO or those appointed for that purpose. There are also cases in which they are not permitted to enter the company’s premises. It follows that they are not considered owners and partners in the company, but only have limited and weak ownership, to which Torah prohibitions do not apply.

So too holds HaGaon Rabbi Shlomo Kluger in his work HaElef Lecha Shlomo (Orach Chaim, siman 238). He writes that he was asked by the wealthy Natan Kalir, who had rights in a factory that sold chametz, whether he was obligated to write a bill of sale for it. He answered that there are people who have only a share in the profit or loss, and have no right to speak or express their opinion; consequently, they are not obligated to sell the chametz. The Chishev HaEphod (vol. 3, siman 62) likewise cites in the name of the Gaon of Tchebin that he ruled to permit based on the responsum of the Maharia Halevi, and he brought the second reason of the Maharia Halevi: that shareholders are not partners in the business at all, but only holders of rights to profits. He wrote that he heard this from many experts in law and legal matters in the courts, and if these words are correct, there is certainly no trace of prohibition in the matter. See there further, where he discusses this at length.

The views of those who disagree and hold that shareholders are considered owners with regard to prohibitions

The Maharshag (Yoreh De’ah, siman 3), a disciple of the Maharam Shik, cites his words, but disagrees and maintains that one cannot introduce a new concept of limited ownership. In Torah law there is no concept of weak ownership that does not obligate a person in its prohibitions. Even though according to Torah law any partner may stipulate and accept various conditions upon himself, such as waiving decision-making rights, arranging a different division of funds, or any other decision, this does not diminish his status as an owner, and he is obligated to ensure that all the partnership’s business is conducted in a manner permitted by Halacha. Especially since, under certain conditions, the shareholders can decide to change the procedure, dismiss the managers and all appointees, and restore to themselves the right to decide — this proves that their ownership remains. Therefore, he holds that one may not permit shareholders any matter that contains a concern of prohibition. [There are other poskim who hold this way as well, but due to limited space we will be brief].

The view of the poskim who distinguish between types of shareholders: those with voting rights and those without voting rights

The Igrot Moshe (Even HaEzer, vol. 1, siman 7) holds that only shareholders who hold a majority of controlling shares are considered owners, whereas minority shareholders are not considered owners, since in practice they have no say or influence in the company’s affairs. There is much to discuss regarding this reasoning.

Likewise, the Minchat Yitzchak (vol. 3, siman 1; vol. 7, siman 26) cites the questioner, who presents the framework of the law and discusses this entire matter at length. There (section 23), he distinguishes between shares whose owners have voting rights — they are considered full owners with regard to Torah prohibitions — and shareholders who do not have voting rights, who have no status of owners at all, since their entire right relates to receiving profits and they have no influence on the company’s conduct. This is treated at great length in the books of the poskim.

Explaining how the sale of shares is effective in the sale of chametz even though it is not registered with the authorities according to law.

It has been instituted by the great poskim that whenever there are shares, bonds and the like, they should be sold in the sale of chametz. There are types of documents in which the matter of shares and the like is already prepared and written, and in some of them the seller must add the sale of shares and the like. This requires discussion, since according to state law every sale requires registration of the transfer of ownership, and in this sale this is not done. Indeed, the great sages of the generation in their time raised this issue, foremost among them the Baruch Taam regarding the sale of chametz, since the appointed minister did not sign as required for every sale.

The Chatam Sofer (Orach Chaim, siman 113) explains that since under the laws of Israel the document is valid, the sale is consequently effective with regard to the prohibition of chametz; especially since the government also agrees to recognize the sale of chametz without the minister’s stamp, because they think the sale is only in order to avoid prohibitions. In Divrei Chaim (by the holy Gaon of Sanz, Responsa, vol. 2, Choshen Mishpat 37), he added that even if one were to imagine that under their laws they would not recognize the sale at all, and from their perspective it is not a sale, we would not follow their laws, for since under the laws of Israel it is a sale, it is effective.

The Minchat Yitzchak (ibid.) wrote that although this deed of sale to a non-Jew is not valid according to state law and the laws of the stock exchange, nevertheless regarding the prohibition of chametz we follow Torah law, both to be stringent and to be lenient; and according to Torah law this sale takes effect even without a registered transfer of ownership. If so, we say that the buyer relies in his mind upon Torah law, and on that he relies in the sale. He concludes that many have the custom to write within the deed of sale that even if the acquisition is not effective according to dina de-malkhuta, he shall acquire it by an acquisition effective according to our law.

Some of the Acharonim did not agree with the Minchat Yitzchak and hold that since in the purchase of shares the agreement is that there is no right to sell without registration, this is problematic. They explain, however, that just as it is customary to permit, in the sale of chametz, leasing to a non-Jew the residence containing chametz even though the tenant has no right to lease it to others — for we have an umdena, an evident presumption, that for the sale of chametz, whose essence is a legal device regarding a rabbinic prohibition, the landlord does not mind — so too here, the stock exchange personnel do not mind the registration of the sale. Therefore, even according to their laws the sale will take effect, because they know that it is only for a short time, in order to remove the prohibition of chametz, and they agree to such a sale. There is more to elaborate on here, for according to this, if they do not intend to sell the chametz, how is it effective? {I discussed this at length in the article “The Validity of the Sale of Chametz When the Seller Does Not Understand Its Meaning”}. This is not the place for it.

Summary of the matter

We explained the concept of a limited liability company, as well as the concept of a share, and the questions regarding Torah prohibitions that arise from it. We discussed the poskim: some permitted holding a share because the shareholder’s right is limited, since he has no significance with regard to the management of the company. Other poskim hold that there is no concept in Torah law of limited ownership that does not obligate one in prohibitions, especially since shareholders may have a situation in which they have the right to change the procedures and restore to themselves the right to decide; therefore, they maintain that shareholders are also obligated in all the prohibitions due to ownership. The Minchat Yitzchak and the Igrot Moshe hold that only shareholders who hold control are considered owners with regard to prohibitions. Likewise regarding the sale of chametz, the custom has been instituted to sell shares, bonds and the like. Although there is room to discuss that according to law a sale is not effective other than according to registration, the great sages of the generation in their time raised this issue and held that the sale takes effect according to Torah law.

From Torat HaMishpat

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