# Shared Profits – And Losses?

# Question

Reuven and Shimon decided to invest with Sureprofit

Brokers, a well-known and reliable firm. They gave them the $50k minimum

sum to be invested equally in two blue-chip companies. Reuven contributed

$20k of the sum, whereas Shimon gave $30k. After two months, the broker

reported that one of the companies had gone bankrupt, whereas the shares

of the other had appreciated by thirty percent. Reuven and Shimon are

getting nervous and decide to disband the partnership. How do they divide

the profits and losses?

# Answer

In Tractate *Kesubos *(93a), Shmuel discusses a

case where two partners jointly invested a sum of money, but one partner

contributed a larger proportion of the investment. Unless specific terms

were agreed or there is a local custom governing such transactions, the

rule is that they share the profits equally. The reason for this law is

explained by the Rosh as being that the smaller investor provides

expertise to compensate for his lower investment. In recognition of this

fact, the major investor is prepared to share the profits equally. He

therefore does not specify any profit-sharing terms when entering into the

partnership. The Tosafos Ri’d suggests that the major investor’s tacit

agreement to be satisfied with half the profits stems from his friendship

with the minor investor. This law is quoted in *Shulchan Oruch, Choshen Mishpot *176:5.

If we consider this to be an equal partnership, then

the equal sharing principle should also apply to losses. Thus, if all the

money should be lost, the two partners should suffer an equal loss. Since

they did not invest equal sums, the minor investor would be forced to

compensate the major partner for his greater loss out of his own pocket.

However, the *Shulchan Oruch *(Ibid. 176:6), basing himself on the

Remah, rules that it is understood that any investor entering into such a

partnership does so on condition that his liability is limited to the sum

he invested. However, it should be noted that if the money that the

partners intended to invest became devalued before they had a chance to

use it, each partner loses in proportion to his investment.

We now have to consider how to look at the results of Reuven and Shimon’s

joint investment. Note that they did not give the broker a sum of money to

be invested as he saw fit (a portfolio). They instructed him to invest

half in Company A and half in Company B. We can therefore regard these as

two separate investments. Thus, the result of investment in Company A is a

total loss of the $25k invested. Reuven loses his $10k investment, Shimon

his $15k. As mentioned above, Reuven does not have to pay Shimon $2,500 so

that their loss should be equal. Reuven entered into the partnership with

the implied condition that his liability for loss be limited to the amount

of his investment. However, when it comes to dividing the profits from

investing in Company B, Reuven’s share is equal to that of Shimon. They

each take half of thirty percent of $25k, namely, $3,750. This results in

Reuven receiving a total of $13,750 (a 37.5% return), whereas Shimon will

receive $18,750 (a return of only 25%). Reuven clearly gains from the fact

that Shimon did not stipulate that profits would be shared in proportion

to the amount invested!