The Halachic Status of a Corporation | Rabbi Yossef Carmel | Beit Midrash

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Parashat Hashavua

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Mishpatim

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As we customarily do on Parashat Mishpatim, we will discuss an element of our approach to the challenges of jurisprudence at the Eretz Hemdah-Gazit rabbinical courts. This time: what is the halachic status of a corporation, and how do our batei din handle the matter?

One of the important principles of the modern financial world is finding a balance between the factors regarding risk-taking in various types of investors. When people are convinced to invest money, the financial world expands, causing an increase in businesses, jobs, and profits. On the one hand, there is a need to protect investors from over-liability. Therefore, the law recognizes a corporation as a financial entity in which a person can invest like an owner of a company without putting at risk funds he does not want to include. On the other hand, in order to prevent abuse of this separation, the law allows the courts to, when appropriate, "lift the corporate veil" that covers the key players in the company. This is done when there is a possibility of illegal or immoral behavior, for example, when an officer obtains an exaggerated salary at the expense of shareholders.

Fundamentally, there is no halachic separation between a person and his property. Anything that has financial significance for an individual carries with it personal responsibility to pay and the potential to extract payment from his property. When a person borrows money, he has a responsibility to return the loan, and payment can be taken from his property even if, in the meantime, the property was sold to someone else. If there were two borrowers for one loan, this lien applies to the property of each. Thus, there is an apparent contradiction between the law, which separates between a person and his property, and Halacha, which does not.

Poskim suggested different delineations of a corporation according to Halacha: Rav Vozner viewed it as fundamentally a regular partnership with special conditions. Rav Simcha Meiron viewed it as something with the appearance of a separate legal being, divorced from its owners. Rav Daichovsky said that it is actually a separate legal entity.

Each one of these suggestions raises many halachic problems. However, if we were to not halachically accept the basic rules of corporations, it would doom any attempt to enable batei din to operate in a modern economic setting. We cannot allow Halacha to be viewed by society as irrelevant. In order to be able to adjudicate when one or more litigants is a corporation without needing to decide the correct delineation, our mentor, Rav Zalman Nechemia Goldberg urged us to have the sides accept, by means of our arbitration agreement, a corporation’s special status. They do so with the following stipulations.

1. The sides recognize the principle that a legal corporation has rights and obligations and can sue or be sued. 2. The sides recognize the principle of limited liability; therefore, claims are made on the corporation’s assets, not those of its workers or stockholders unless beit din view them as personally responsible. 3. Based on the above, the sides relinquish their rights to make claims on property beyond that of the corporation.

May we merit to present monetary Halacha before ever growing parts of the nation in a manner that will sanctify Hashem’s Name.