Series of Answers by the Eminent Scholar Ata’ Bin Khalil Abu Al-Rashtah, Ameer of Hizb ut Tahrir, to the questions of the visitors of his Facebook page "Fiqhi"
Answer to a Question
To Abu Rashed
Question:
Our eminent Sheikh, peace be upon you and the mercy of Allah and His blessings. I present some questions to you, hoping for an answer. May Allah reward you on our behalf with the best of rewards and bring about victory and empowerment at your hands; indeed, He is All-Hearing and responds to prayers.
- Companies, Factories, and Trademarks: We know that in Islamic companies, the physical person (al-badan) must be present. If a company is established for the purpose of setting up a factory that produces, for example, electrical or electronic devices, and this company and its factory gain a well-known trademark in the market, and then it happens that the owners of the company want to sell it:
a) Is there something in Islam called the "market value of the company," separate from the subject of shares in Capitalism?
b) Does the trademark have a value by which it is appraised when selling the factory?
c) Does the trademark follow the factory or the company? That is, if the company remains but sells one of its factories or a production line for one of its devices, what is considered in estimating the price?
d) In the case of the dissolution of the company, what happens to the trademark?
e) A factory belonging to a company has exports and imports, and it may have outstanding debts with deadlines to suppliers of raw materials, for example, and it may have funds due from traders at different intervals. Is it necessary to "zero out" debts and receivables before the sale, keeping in mind that this is a continuous process as long as there is production?
f) What about the employees and their contracts with the company when the factory is sold?
- Service Companies: There are companies whose establishment does not require large capital as they provide services. An example is a software company, which is based on an idea; it creates a program, an application, or more and sells it in the market. This application (which is merely programming codes that perform a specific function) gains a large number of users, and consequently, this company may have a large market value based on that. When selling the application to another party (another company), it sells the idea and the resulting lines of programming code such that it has no right to use them after the sale to produce something similar (i.e., the idea). An example is an application that calculates a car's route from one place to another and chooses the best roads and arrival time, etc. How is such a reality dealt with in Islam?
Answer:
And peace be upon you and the mercy of Allah and His blessings,
To begin with, may Allah bless you for your kind prayer for us, and we pray for goodness for you.
First: Before answering your many questions, I would like to point out that companies in Islam are different from companies in the Capitalist system. A company (ash-sharikah) legally is "a contract between two or more people, in which they agree to perform a financial work with the intention of profit." Thus, the company in Islam is not a juristic person (shakhsiyah ma'nawiyah) from which actions proceed in this capacity; otherwise, these actions would be legally void. Rather, it is a specified entity in which there must be a physical person (badan) who acts. We clarified this matter in the book The Economic System when discussing joint-stock companies and their invalidity, where we said:
"...The company is a contract to dispose of property. Developing property through it is an enhancement of ownership, and enhancing ownership is one of the Shariah-governed disposals (tasarrufat shar'iyyah). All Shariah-governed disposals are verbal disposals, and they only proceed from a person, not from property. Therefore, the enhancement of ownership must be from the owner of the disposal, i.e., from a person, not from property...
Accordingly, the disposals that occur from the company in its capacity as a juristic person are legally void; because disposals must proceed from a specific person, i.e., from a specified human being, and that this person must be among those who possess the capacity to act...
Legally, disposals are only valid from a specified human being who has the capacity to act, by being an adult of sound mind, or a discerning child of sound mind. Every disposal that does not proceed in this manner is legally void. Attributing the disposal to a juristic person is not permissible; rather, it must be attributed to whoever possesses the capacity to act among human beings..."] End quote.
In other words, the actions and activities of a company in Islam are inseparable from the company itself and the partners. The company is not one thing and its activities and actions another... However, some of the questions you asked appear to be influenced by the practical reality of Western companies, where some of their activities can be separate from them, and the company has a juristic personality separate from its factories, for example... This is inconceivable in a Shariah-compliant company. Rather, a legal company is inseparable from the partners, especially the physical partner (sharik al-badan), just as it is inseparable from its works and activities because the company contract is focused on these works and activities.
Second: The answers to your questions:
A company in Islam, in its name and essence, is not bought or sold. Rather, it can be liquidated by the agreement of the partners in a legal manner, and its physical assets and profits are divided among the partners according to the amount of their participation, and then the company ends. That is, its existence ends; it is not sold to another party with the company remaining in existence under its name and capacity while those who bought it take it over! The company has no material value in itself because the company is "a contract between two or more people, who agree to perform a financial work with the intention of profit." That is, a company in Islam is the partnership and the joining, and it is not that juristic person separate from its owners as it is in some of its forms in the Capitalist system. As for what is bought and sold, it is legally possible for the company's properties—such as buildings, machinery, location, production quality, and the like—to be what the buyer and seller agree upon. If the sale is completed, the old company and its owners have ended, and it becomes a new company with new owners.
What you call the "market value of the company" or factory: if it is due to what is permissible in Shariah, such as the commercial logo, the trademark, reputation, customers, and similar matters that give the factory or company a value exceeding the value of its physical assets, then in this case, those factors can be considered in valuing the factory upon its sale, or valuing the company when one of the partners wants to exit it to estimate his entitlements. As for if it is due to impermissible matters like intellectual property and the like, it is not permissible to look at them during the aforementioned valuation.
If a certain company has a commercial logo or a trademark that it adopts for the products of one of its factories, and the company's name is not on it but only the factory's name, then if it wants to sell that factory, it may sell the commercial logo and the trademark along with the factory. However, if the commercial logo and trademark bear the name of the sold company, it ends with the sale of the company.
The trademark, as we mentioned, expresses the entity producing the commodity, and its value is derived from the quality of the commodity and the reputation that the producer of the commodity has gained in the market, etc. If the company producing the commodity dissolves and production ends, the trademark becomes nullified following the dissolution of the company, and it is not correct for anyone to misappropriate it for themselves because it does not belong to them. However, if one of the partners wants to leave the company, the value of the trademark can be taken into account when valuing the company's assets in order to give the departing partner his right in the company.
Regarding your question: "A factory belonging to a company has exports and imports, and it may have outstanding debts... Is it necessary to 'zero out' debts and receivables before the sale?" A factory in Islam is not separate from the company; rather, it is its work or one of its works. The one upon whom the debt falls is not the factory, because the factory is not an independent entity but rather only the work and the physical activity. The one who owes the debt to others and to whom others owe debts is the company whose work was the factory or one of its works. If the factory is sold, what is sold is the building, production tools, and what is attached to them. But the rights that are the responsibility of the company and the rights belonging to the company must be settled by the company with the relevant parties, separate from the subject of selling the factory. It is not legally correct to sell the factory with its debts and receivables as happens in the Capitalist system.
Regarding your question: "What about the employees and their contracts with the company when the factory is sold?" The contracts of these employees (ujara') legally are with the company because the factory is not a disposing entity; it is only the work of the company or one of its works. If the company sells the factory in which they work, their work in the factory ends because its location has ended with the sale of the factory. Here, the company can assign them other tasks in other fields within the company's operations while maintaining their employment contracts until they expire, or it can pay them their wages for the remainder of the employment period without employing them. It can also, by mutual agreement with them, terminate their contracts so that the new owner of the factory can establish new contracts with them if he sees that fit due to their experience. All of this is left to the agreement of the parties. In any case, the employment contracts of these employees remain valid with the company until their term ends, as employment contracts in Islam are binding (lazim) and must be specified for a certain period and end with the expiration of that period if not renewed.
Regarding your question about software and application companies: programs and applications are products that have a utility (manfa'ah), so it is legally permissible to sell them. That is, it is permissible for a company that developed a program or application to sell the original program or application to another party such that it gives them the relevant information and codes. In this case, the first company that sold the program or application is not legally allowed to continue using this program or application as long as it has sold it and sold its origin—that is, it sold the idea upon which the application is based and committed itself in the sales contract not to use it.
I hope these answers are sufficient. Allah is the All-Knowing and Most Wise.
Your brother, Ata’ Bin Khalil Abu Al-Rashtah
28 Rabi’ al-Awwal 1444 AH Corresponding to 24/10/2022 CE
Link to the answer from the Ameer's page (may Allah protect him) on Facebook: https://www.facebook.com/HT.AtaabuAlrashtah/posts/664247338595972