Section One
Companies
Ash-Sharkāt
A company (shirkah) is: ownership taking place, for more than one person, over one owned thing, as a form of common ownership, when one or more partnership (ishtirāk) reasons come into play. The details are as follows:
1075. Reasons calling for joint ownership fall into three categories:
First: Purely forced reasons, which are inheritance, also wills and waqf since they are types of declarations as explained. Joint ownership is established as a result of inheritance and wills concerning assets, benefits and transferable rights; a waqf joint ownership is exclusive to assets, not benefits or rights, while an habs (i.e. entailment for a fixed time duration) joint ownership is exclusive to benefits, not assets or rights.
Second: Purely free-will reasons, which are:
a- Two or more people agree on joining their assets through a company contract, so the company is established by a contract, making the asset of each of them owned by the others in common ownership (partnership), even if each of the assets stays with its (original) owner without mixing with the others.
b- A contract giving ownership to more than one person taking place at the same time, such as a gift or by more than one person authorising one person to buy an asset for them, or the like.
c- The transfer of a common part of the owned asset or its benefit by one means of transfer, such as if a person sells half of his house or rents it, rendering the person to which it was transferred a partner to the transferring person in the ownership of the asset or the benefit.
d- Hiring two or more workers to accomplish one piece of work in a way that the payment/wages is for the one work, such as cutting a tree or farming a piece of land, so when they finish the work, they become partners in the payment/wages.
Third: Reasons that are based on free-will sometimes and forced at others, which are two in number:
a- Possession, because of which the company/partnership is established out of free will, such as if two or more persons choose intentionally to shoot one animal, dig one canal or ihyā’ (renovate, cultivate etc.) a piece of wasteland, or when one person possesses one freely allowed thing on behalf of a group of people without their asking, so if they allow what he does, they become owners of what he possesses. The company/partnership becomes forced on them when one of them shoots an animal at the same time that the other shoots it without their knowledge, both hitting their target and killing it, or the like. This reason for a partnership is exclusive to assets, not rights or benefits, as is clear.
b- Mixing, because of which a company is established if the two mixed things are of one type, cancelling with this mixing the independent identity of each part of them, such as olive oil mixing with more olive oil. It is also established when the two mixed things are of different types and the identity of each of them is cancelled and a new third nature is created, such as mixing vinegar with honey. However, if each type in the mix continues to keep its independent entity in spite of the mixing, such as mixing wheat with wheat or sesame with sesame, in this case a partnership is not established with such mixing, not to mention not being established if the mix is of two different types and each one can by separated from the other, such as mixing wheat with barley, and the like; in this case if each one of them wished to take his asset, he has to resort to solh (mutual agreement) with the others (but) without involving interest – if the things are measured by weight or by measure (measuring vessel) – as according to the rulings explained in the section on transactions that introduce interest (see Part One, Chapter 4.)
And since this mixing may take place out of the free will of the owners, the partnership/company becomes one of free will; and since it may take place out of their control, the partnership/company becomes forced.
1076. It has become clear from the above that a company/partnership is established as a result of the agreement of two or more parties to bring together their assets through contracts and agreement, either out of their wish to become partners or with the aim of utilising their joint assets for making profit in productive ventures. This type of partnership is what we are discussing in this section.
A company’s contract must contain the proposal (ijāb) of one of them using any wording that means partnership, such as ‘shāraktok’ and the like, and the acceptance (qobūl) of the other using any wording that means accepting; it also becomes established through mo‘ātāt (handling/pursuing upon a request). In addition, the qualifying conditions that apply to financial contracts must be present in the contracting parties – sanity, choice and intention, not have been indicted for unreasonable conduct or bankruptcy, and the guardian’s permission if the contracting party has not reached the Islamic legal age.
1077. It is not conditional for a partnership by contract that the assets are present in one place, not to mention their mixing, but it is sufficient the mere contracting that the specified asset of each of them becomes jointly owned by the parties in common ownership despite the assets of each of them staying in its place, for example in their safes or depots.
1078. For a contract company to be established, the asset involved in the partnership must be owned and at the owner’s disposal even if some time later, so establishing a company is not prevented if the asset is a debt, mortgaged, rented, loaned, or any similar arrangement that does not contradict the partner’s ownership. This is in contrast to an agreement to become partners in an asset that is not present at the time; although such an agreement may be a kind of agreement that is acceptable to all parties, it is not acceptable in the Shari’ah; this may take place in two ways:
The first: What the scholars call ‘shirkat al-Wojūh’, which is when two or more people agree that each one of them buys by postponed payment (nasi’ah) one item, then each one of them sells what he bought independent of the other, but the profit is shared by both, as are any losses.
The second: What is called ‘shirket al-Mofāwadah’, which is when two or more people agree that the profit that each of them gains for any reason is common to all of them, whether this takes place through one of them hiring out himself or his assets independent of the others, from the profit of a trade he practises or farming he pursues, a gift given to him or inheritance or possession or through any other source; provided that any loss that befalls any of them is shared by all them, whether this is a result of a damage compensation, offence, trade or otherwise.
If they contract on the basis of one of these two ways, the contract is not valid and each of them will keep his own profit for himself, and bear his own losses, without the others sharing in the outcome. This is because the asset which is intended to be used for the partnership has not yet entered in the ownership of its owner.
1079. A contract company is binding and cannot be cancelled except through dividing the shares. This is despite the fact that their assets sometimes are not mixed in such a company; this is because the contract has brought each asset used in the company into the common ownership of all the parties of the company, in which case the shares cannot be distinguished except through dividing them between them, either by force or through an agreement that is acceptable to all.
1080. Since the result of a company is the joining of its parties with every part of the owned assets in common ownership, it is not allowed for any of them to dispose of the asset or part of it except with the permission of the rest of parties as long as the company exists; and they have to come into an agreement acceptable to all on how to dispose of any common asset.
1081. If a partner gives his partner permission to dispose of a company asset in a certain way, the permission is binding to the former for all time, it is allowed for him to back down from his permission after issuing it, even if after a short time. The partner given the permission must keep to the extent and manner that has been permitted.
1082. If a person wishes to make profit using his asset by trading in partnership with another, then if the asset prepared for trading is (already) jointly held between them, they need to contract on the investment only; otherwise they contract for two inter-related matters: the specified asset of each of them is to be jointly held between them, and the aim of partnership is to trade using it in a certain way and under certain conditions. When the investment contract is established, it becomes obligatory on all parties to observe what is agreed in it both in its limitations and its allowances. Such a contract is binding and does not become invalidated unless by relieving the contracted parties from its obligations (iqālah), or by invalidation decided by the person who has the choice, or by the end of the term of the company if it has a limited term. When the company is terminated, however, the asset itself remains common to all parties under common ownership that does not terminate except by dividing the shares. This type of partnership is called an ‘investment company’.
1083. It is not allowed for one of the parties of an investment company to borrow anything from the assets of the company, even if buying some of its assets and paying the price from its other assets, unless he is given permission to do so.
1084. It is allowed to buy shares in stock investment companies that are involved in allowed business, and in even those that are involved in several types of business, both allowed and forbidden, if the shares bought are limited to the allowed side, unless there is another shar’i objection to his involvement with them, such as if buying their shares serves as a kind of encouragement to the company to do forbidden business and so on.
1085. For the partner who is permitted to carry out a disposal, or the one who has the right of disposal according to a binding contract or condition, his control over the asset is regarded as one of trust, so he is not obliged to pay compensation for any defect or damage unless this results from his transgression or negligence.
1086. An investment company is terminated when its capital is damaged as a result of an accident – natural, unintentional or intentional - or when the losses exhaust it, or when it is lost without hope of finding it; this is because the company is established on the basis of capital, so if it loses it, it is terminated and cancelled. In fact, for it to be terminated, it is sufficient if most of its capital is damaged in a way that the rest of it cannot enable the company to do any kind of beneficial business that corresponds to its aim.
1087. Whatever the type of the company, any one of the partners has the right to request the dividing of the assets and to become independent and sole owner of his commonly owned share, unless he is committed to a binding condition or a company contract as explained above, in which case if the asset is suitable for dividing by one of the types of divisions – agreement that is acceptable for everyone or by force – then they must accept that; but if the asset is not suitable for dividing, or if the division is based on an agreement but they cannot agree on how to carry it on, in this case he is allowed to request selling it and dividing its price. The question of dividing is too detailed to cover here, but you can consult our detailed guide ‘Fiqh ash-Shari’ah’, vol. 3.