Halakhot of Investing in the Stock Market (2)

 

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The VBM and the Yeshiva wish a very warm mazal tov to Rav Mordechai and Debby Friedman on the birth of their daughter Ora Liba.  Rav Mordechai is the editor and sho'el u-meishiv of the VBM Halakha shiur, and Debby is administrative coordinator of the foreign students' program.  Tizku le-gadlah le-Torah, le-chuppa u-lema'asim tovim!

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SECOND INSTALLMENT -  FORBIDDEN INTEREST (USURY) 

 

In the first installment of this shiur, we discussed the GENERAL question of the ownership status of the shareholder.  As we explained, one point of view sees the shareholder as an owner of the company and of its assets - like an ordinary partner.  The other point of view views the shareholder as a kind of creditor - he has made an investment and will receive a return, but the true owner of the company is someone else: a controlling interest, the management, or perhaps even the company itself, recognized as a legal person in halakha as it is in the secular law.

 

We also called attention to the many ways in which a shareholder resembles a silent partner (noten iska), whose halakhic status is well established.

 

We concluded that while many lenient opinions exist,  the most prominent contemporary authorities are not willing to create a blanket exemption from halakhic responsibility for the shareholder, but rather view him as a partner at least to some extent.  We also pointed out that the power of the minority shareholder and his SECULAR legal status as owner are rather greater than many people are aware.  However, even the stringent opinions acknowledge the high degree of insulation of the shareholder from company operations.  This insulation may lead to various leniencies which, however, need to be discussed on an ad hoc basis.

 

We now commence such a discussion, treating each area of halakha in a separate section.  This installment will deal with the interest prohibition - "ribit."

 

INTEREST IN THE PUBLIC CORPORATION

 

I.  STRINGENT OPINIONS

 

This is one of the earliest subjects to find its way into the halakhic literature with respect to a public company.  It is discussed in the Kitzur Shulchan Arukh 65:28.  There Rav Ganzfried forbids borrowing from a savings bank which has Jewish investors, even if the fund administrators are non-Jews.  He also forbids investing in such a bank, since it is likely that some Jews, disregarding the Kitzur's ruling, will borrow from the bank.  (It seems that the "shares" in such a bank are similar to what we would call a deposit - just as in the old-fashioned savings bank each depositor was nominally an investor.)

 

This is indeed the obvious answer.  Shareholders in the bank are considered partners, each cent is jointly owned by each partner, and consequently each loan TO a Jew is partially a loan FROM a Jew.  The Kitzur's conclusion that no leniency results from the fact that the administrators are non-Jews follows from the ruling of the Tosefta (BM 5:20) that it is forbidden to borrow at interest from a Jewish lender who employs a non-Jewish trustee.

 

The Maharshag (Rav Shimon Greenfeld - a student of the Maharam Shick) also rules strictly (YD 3), as does the Minchat Yitzchak (III:1, VI:77).

 

However, many lenient opinions exist.  We explained in the first shiur that the modern public corporation has three main characteristics: limited liability, separation of ownership and control, and legal personality.  Interestingly, each one of these characteristics has been cited as constituting grounds for leniency regarding interest.

 

 

II.  LENIENCY BASED ON SEPARATION OF OWNERSHIP AND CONTROL

 

One basis for leniency has been found in the insulation of borrower from lender which exists in the corporate structure, which as we mentioned is characterized by separation of ownership and control.

 

One source for such a leniency is the Maharit.  The Maharit (Responsa I:116) refers to the rule that a person may be a silent partner with a non-Jew who trades on Shabbat because the gentile acts according to his own will and interest (ada'atei de-nafshei). He then goes on to assert that for the same reason one may be a silent partner with a non-Jew who will lend at interest to Jews.  The active partner has sole discretion, and furthermore, unlike the trustee mentioned in the Tosefta, he is acting in his own interest and not on behalf of the Jewish partner.  This leniency is cited without comment in the glosses of Rabbi Akiva Eiger to YD 168-9:21. 

 

The Maharit evidently understood that the interest prohibition does not inhere in the funds being lent, but rather in the existence of a consentual agreement between the parties.  Or, to state it differently, he holds that when one party has sole discretion the other partner is not really considered the owner of his share but merely a creditor or investor.

 

However, the Erekh Shai (YD 169:23) opposed this ruling, taking for granted that the prohibition inheres in the actual money being lent.  This is unlike Shabbat, where there is no prohibition for a Jew's property to be earning, but only a prohibition on the Jew himself to deal.

 

As we pointed out, a shareholder resembles a silent partner, and several authorities likened this dispute regarding a silent partnership to the case of stock ownership.  The Maharshag (YD 3) rules like the Erekh Shai and therefore is stringent regarding stocks, whereas the Chelkat Yaakov (in the notes of the author's son - YD 70) and the Mishne Halakhot (VI:145) consider the ruling of the Maharit to constitute a basis for leniency with stocks.  This would be the case if the managers of the firm were non-Jews with some interest in the company.

 

There is another leniency which may also stem from the shareholder's insulation.  The originator is  Rav Ganzfried's redoubtable contemporary, Rav Yosef Shaul HaLevi Natanzon.  In a responsum addressed to Rav Ganzfried (Shoel uMeshiv first edition III:31 - henceforth "SUM") Rav Natanzon asserts that there is no transgression involved in savings plans.  He even expresses confidence that in the next printing of the Kitzur Shulchan Arukh (which indeed saw over a dozen printings in the author's lifetime) Rav Ganzfried would reverse this ruling.  (In fact, Rav Ganzfried restated the ruling in "Lechem HaPanim" as well.)

 

Rav Natanzon's leniency seems to be based on "bereira" (imputation) - the halakhic concept of viewing a mixture of permitted and forbidden substances as two distinct clumps, one permitted and one forbidden.  He writes that since there is no way of determining exactly who it is that lends to the Jewish borrowers, there is therefore no prohibition.

 

Others expressed surprise at this ruling.  (See Responsa Maharam I:20.) First of all, we usually use bereira in a POSITIVE way - in this instance, we would want to view the money borrowed by Jews as being definitely that contributed by the non-Jews, while the Jewish money is referred to the gentile borrowers.  What does Rav Natanzon mean when he says that we can't prove the NEGATIVE - that the Jews are borrowing from Jews?  Second of all, ribit (usury) is a Torah prohibition, and we rule that bereira cannot be employed to save us from such a ban!  (Eruvin 37b.)

 

It seems to me that an alternative explanation of the Shoel U'Meshiv is possible.  The SUM begins his discussion by mentioning the famous leniency of Rashi.  The Mordekhai (BM 338) explains that Rashi permitted sending an agent to borrow money at interest from another Jew.  Since there is no agency for a prohibited action, (ein shaliach le-dvar aveira) the agent is not really authorized to conclude the deal, and so no interest is actually contracted.  (See Beit Yosef YD 160 and Rema YD 160:16 regarding when we may rely on this leniency.)

 

The basis of the leniency is that by virtue of the rule that there is no agency for forbidden acts, either the loan itself or the interest on the loan is actually contracted independently by the agent.  In this case, we really have the agent offering money to the lender to lend money to the borrower (Chavat Da'at 160 be'urim 8), or alternatively the putative borrower offering money to the lender to convince him to lend to the agent (Mishneh LeMelekh Malve uLoveh 5:14).  Either way, this is permissible as the gemara rules that "the Torah forbade only interest that passes from the borrower to the lender" (BM 69b).  (The Chatam Sofer VI:26 gives yet a third explanation.)

 

The SUM opens by saying that even those who oppose Rashi would be lenient in this case, BECAUSE it is not determined ("mevurar") that a Jew is lending to a Jew.  One possible understanding is as follows: The basis of the gemara's leniency is that interest is forbidden only if a personal relationship and obligation is established between borrower and lender.  Rashi further holds that since the agency is partially void, borrowing through agency is permitted.  Those who disagree consider that the agency of the go-between is nonetheless sufficient to create a  forbidden personal relationship, despite the technical halakhic rule of "no agency for transgression".  After all, the borrower and lender are perfectly aware of each other's identity.  (And in the case of the gentile trustee mentioned in the Tosefta, even Rashi agrees that a relationship is established, because a trustee is not an agent but merely a mechanical messenger.)

 

However, avers the SUM, when it is IMPOSSIBLE to establish the exact identity of the lender, or even to know whether he is a Jew or a non-Jew, then EVERYONE agrees that there is no PERSONAL relationship and obligation.  We do not require a POSITIVE "bereira" since the prohibition is not in the object of the money but rather in the personal relationship of the parties.

 

There is an important difference between the explanations.  If the leniency is based on "bereira," it is necessary that non-Jews supply the total amount borrowed by Jews.  If Jews borrow forty percent of the money, it would be necessary that at least forty percent of deposits come from non-Jews.  But if the leniency is based on Rashi as I explained, then it may be sufficient if the total amount of gentile funds cover each loan to a Jew, even if the collective sum of gentile funds doesn't cover the collective Jewish borrowing.  For instance, if the largest single Jewish loan is ten percent of bank funds, it would be sufficient if ten percent of the deposits came from gentiles.

 

In the case of the average large public company outside of Israel, both conditions are certainly fulfilled and the SUM's leniency is relevant.

 

Interestingly, the Mishneh Halakhot suggests that even the Erekh Shai would admit that the Maharit's leniency is relevant in a corporation, and this seems to echo the claim of the SUM that even those who dispute Rashi would admit that his leniency applies to a savings bank.

 

 

III.  LENIENCY BASED ON LIMITED LIABILITY

 

Rav Moshe Feinstein (YD II:62) ruled that a loan with limited liability is not a loan at all, since the borrower is not personally beholden to pay it back.  Therefore, he permitted lending money to a limited liability corporation.  A similar leniency was discussed and rejected by the Maharshag (YD 3 at the end).  Later on he composed a responsum which concluded that such a loan is permissible, but he refrained from publishing it.  It was published by a student in Noam volume 2.

 

Of course, this leniency only works if the BORROWER is a limited liability organization.  But a limited liability lender has a full claim on an individual borrower and so the prohibition applies - as Rav Moshe explicitly writes.

 

Many authorities disagree with this ruling.  They point out that the gemara forbids many cases in which the borrower promises to pay back a sum which is anchored solely in some particular asset, and so the loan is not a personal obligation.  For instance, the gemara forbids borrowing money which will be repaid from the fruits of an orchard (pardisa), even though the payback is not fixed but rather is dependent on an interest in the orchard (BM 73a).

 

It seems that the difference between all of these cases and the case of limited liability is that limited liability involves what is known as a "floating lien".  In an ordinary lien, the lender is entitled to collect from a particular asset owned by the borrower at the time of the LOAN.  In the case of the pardisa, the lender acquires an interest in a certain asset at the time that the loan is DUE.  But a floating lien creates a lien only on those assets in the possession of the borrower (the corporation) when the loan is COLLECTED. 

 

Rav Shlomo Zalman Auerbach (Minchat Shlomo 28), discussing Rav Moshe's approach (though he does not mention Rav Moshe by name), makes this exact distinction.  He points out that in the forbidden case of borrowing against the cargo of a ship, the lender's return is limited to the merchandise in the ship.  Even so, once the ship ARRIVES, the borrower becomes PERSONALLY liable for the quantity of merchandise which arrives.  But in the case of a corporation, the shareholder NEVER becomes personally liable for any sum.  Rav Auerbach surmises that the lenient view considers a floating lien to be a kind of partnership and not a loan at all.  He himself does not agree with this view, which as far as I know remains nearly a "da'at yachid" - a ruling of a single sage.

 

 

IV.  LENIENCY BASED ON LEGAL PERSONALITY

 

A few authorities have permitted investing in a corporation which lends at interest to Jews because the corporation itself, rather than the individual shareholders, is considered the lender.  This leniency can take two forms.  In the more extreme view, the very status of the corporation as a legal person makes it exempt from the usury prohibition.  In another form, the corporation assumes the status of the majority of its shareholders.  If most of the capital comes from non-Jews, the corporation as a whole is considered a non-Jewish entity and one may borrow from and lend to it at interest.

 

A very early responsum, that of Rav Yitzchak Izak HaLevi (Ettinga - Responsa Mahari HaLevi II:54), concludes that the bank, and not the shareholders or the directors, is the owner of bank funds.  This responsum is very widely cited and is even quoted in "Darkhei Teshuva" on Yoreh De'a - a very widely read summary of the responsa literature. 

 

Rav Yosef Rosen, the famed "Rogatchover", indicates that a bank is not a person or a personal entity - it is "form" as opposed to "substance".  He therefore rules that borrowing from a bank at interest is permissible, even though some shareholders are Jewish (Tzafnat Pa'aneach 184).

 

Rav Tzvi Pesach Frank agrees that a true "legal person" is exempt from ribit, and for this reason permits borrowing from a governmental bank (Har Tzvi YD 126).  However, he does not consider an ordinary public corporation to be "ownerless" - for the reasons we explained in the first installment - and therefore is NOT lenient regarding a true shareholder.

 

A very interesting and surprising leniency is that of the Maharam Schick (YD 158).  Referring to the gemara in Chullin (beginning of chapter 11, starting on 135a) which exempts partnership with a gentile from various Torah restrictions, the Maharam Schick proposes that regarding interest as well there is no prohibition whenever there is a gentile partner.  But other authorities have pointed out that we generally refrain from ruling on the basis of our own inferences from Torah verses.  (See Maharshag YD 3, written by the student of the Maharam Schick.)

 

Last week we explained that the lenient view towards corporations views the shareholder as a mere creditor - not an owner or partner.  Therefore, the operations of the business are not attributed to the shareholder.  The editor of the Halakha series on the VBM, Rav Mordechai Friedman, has suggested that this view may actually constitute a STRINGENCY regarding the relation of the shareholder to the corporation.  It is true that the shareholder is not lending at interest to the company's clients, but he is lending at interest to the company itself!

 

This concern is certainly not relevant to the "limited liability" leniency, which is a blanket leniency regarding lending to a corporation, nor to the "legal person" leniency which views the corporation as a non-Jew.  It is also not relevant to the SUM.  Instead of claiming that the investor could be viewed as lending to non-Jewish borrowers FROM the business, the SUM will claim that the investor can be viewed as lending to non-Jewish fellow investors IN  the business, and that they are the ones giving him interest.  (It would create a new problem for the SUM only if all the shareholders were Jews and the borrowers non-Jews.)

 

This concern COULD be relevant to the Maharit, who is lenient regarding a business's loans to others.  For instance, if we accept the Maharit's leniency then it follows that even when giving an "iska" (silent-partner loan) to a Jew, the investor has committed no INTEREST transgression if the active partner lends at interest to non-Jews.  (Or even to Jews - though in this case, if he knows what the money is being used for, he is a "mesaye'a" - an accomplice.)  But he is himself guilty of receiving interest from that partner when he accepts profits on the loans.  This problem is avoided in practice because a Jew is considered the agent of the silent partner and we do not say that he is acting on his own discretion.  But the "lenient" view does not view the firm's management as an agent but rather as a borrower.  If the putative owner - such as a controlling interest - were Jewish, a problem could arise.

 

Of course, there is ALWAYS a problem with interest when giving an iska to a Jew.  As we explained last week, a normal iska is half loan, half deposit, and the concern exists that the labor of the active partner is considered interest on the loan half.  For this reason the mishna (BM 68a) tells us that the active partner must receive a salary in addition to half the profits.  But here we are talking about an additional problem, because the entire amount could be considered a loan and normal profit be considered interest.  It does seem that the "lenient" point of view would have to make sure that the business was not sold at such a discount as to be "karov le-sakhar" - a sure profit, like the "pardisa" case mentioned.  As a matter of fact, all stock market investments are "karov le-hefsed" - they frequently lose money, and almost half of trading days end down.  So it doesn't seem like the problem is of practical importance.

 

 

V.  SUMMARY

 

Rav Menashe Klein (Mishneh Halakhot VI:145) writes: "In relation to a bank or company which is majority gentile owned, I have already shown that the opinion of most of the Acharonim is to disagree with the Kitzur Shulchan Arukh and to agree to permit it - where there is a majority of non-Jews."  Indeed we have seen that each of the three characteristic  traits of a public corporation - limited liability, separation of ownership and control, and legal personality - has served as the basis for a leniency.

 

Of course, we have also seen that each respective leniency is the subject of a dispute.  Regarding limited liability we have seen that most authorities do not consider this a leniency on the Torah level; furthermore, it only permits lending to a corporation, not borrowing from one.  Separation of ownership and control is the subject of a hallowed discussion and dispute which began in the time of the earliest Acharonim.  And as we mentioned last week, many authorities are not willing to consider a modern stock corporation as a full legal person in the eyes of Torah law.

 

Regarding many of the halakhic problems we raised last week, investing in Israeli companies, where most stockholders and most workers are Jewish, is a special problem.  Regarding interest, ironically, the opposite may be true.  Most large Israeli companies which deal in CONSUMER finance (banks, credit card companies, etc.) do so according to a heter iska - an agreement which recasts credit agreements as investments.  (This cannot be assumed to be true for credit deals which are not at the consumer level.) Conversely, almost every company abroad will have at least some Jewish clients, and almost certainly there is no heter iska.  So according to the stringent opinions such as that of the Minchat Yitzchak, the problem is worse investing abroad.

 

[Note: This is an updated and expanded version of a shiur which was sent out in 5756.]