MISCONDUCT OF DIRECTORS Section 560 of the Penal Code is as follows: § 560. Every director of any stock corporation who concurs in any vote or act of the directors of such corporation or any of them, by which it is intended, either— 1. To make any dividend, except from the surplus profits arising from the business of the corporation, and in the cases and manner allowed by law; or, 2. To divide, withdraw, or in any manner, except as provided by law, pay to the stockholders, or any of them, any part of the capital stock of the corporation; or, 3. To discount or receive any note or other evidence of debt in payment of any installment actually called in and required to be paid, or with the intent to provide the means of making such payment; or, 4. To receive or discount any note or other evidence of debt, with the intent to enable any stockholder to withdraw any part of the money paid in by him, or his stock; or, 5. To receive from any other stock corporation, in exchange for the shares, notes, bonds, or other evidences of debt of their own corporation, shares of the capital stock of such other corporation, or notes, bonds, or other evidences of debt issued by such other corporation; -is guilty of a misdemeanor. (Enacted February 14, 1872.) Clauses 1 and 2 are considered elsewhere under the appropriate headings. In construing the third clause, it has been held that a promissory note given in payment of a subscription to the capital stock of a banking corporation is not void; that accepting the note "neither violated public policy, good morals, nor positive law" (which certainly is going far on the last point); the liability of the direc tors to a criminal prosecution was not involved in the case. 19 The meaning of clause 4 is obscure. The last clause (5) of this section is unusual, indeed extraordinary in corporation law, either civil or criminal. While the object of this provision does not appear (for nowhere in the statutes is it made unlawful for one corporation to invest its funds in the securities of another corporation), probably this section was intended to prevent one corporation from owning another, or one being merged into another. It seems a little remarkable, in view of the fact that this section has been in our statutes for nearly forty years, that no case involving any of its clauses, except the third, has reached the appellate courts, and that there has been no judicial construction of its meaning, or application of it made to any particular state of facts. It is perfectly legal and proper for a corporation to issue its shares and securities to a stockholder of another corporation in the purchase of the stock of the other corporation owned by the stockholder; in that way one corporation becomes the owner of another corporation; this is done in cases almost without number in all of the states of the Union, and also in this state. This prohibition runs only against the directors exchanging shares or securities of their own corporation for the shares of another corporation, directly with the other corporation. Some question might also be raised whether this section (passed in 1872) is not in effect repealed by the later constitutional provision (1879) in article 12, section 11, which is really a permission to issue stock and bonds for money paid, labor done, or 19 Pacific Trust Co. v. Dorsey, 72 Cal. 55, 12 Pac. 49, 13 Pac. 148. But see Jefferson v. Hewitt, 103 Cal. 624, 630, 37 Pac. 638. property actually received, and article 22, section 1, declaring that all laws inconsistent therewith shall cease upon the adoption thereof; also section 361a of the Civil Code, which was first adopted in 1903, provides that a corporation may sell all of its property as a whole with its business and franchise, and no limitation is prescribed as to what may be received in payment therefor. Section 309 of the Civil Code expressly prohibits the directors from creating any debts beyond the subscribed capital stock, and it was seen that if they did so the debt was not void, but, under certain circumstances, the directors were personally liable for its payment. Where a statute declares the consequences of its violation, but does not say that the contract is void, the action of the statute is generally confined to the consequences named, and the contract is held to be valid. Sometimes, however, when the statute raises the forbidden act into a crime, the contract arising out of it is held to be void; but this often depends upon whether the act is malum in se or malum prohibitum. Certainly the act mentioned in this section is not immoral; nothing more than malum prohibitum. A solution of this question involves a consideration of a great multitude of cases in other tribunals, for in our courts it will be one of "first impression," and therefore nothing final can now be foreseen. SUNDRY OTHER CRIMES BY OFFICERS Sections 561, 562, and 563 of the Penal Code are as follows: § 561. Every officer, agent, teller, or clerk of any savings bank, who knowingly overdraws his account with such bank, and thereby wrongfully obtains the money, note, or funds of such bank, is guilty of a misdemeanor. (Enacted February 14, 1872.) § 562. Every officer, agent, teller, or clerk of any bank, and every individual banker, or agent, teller, or clerk of any individual banker, who receives any deposits, knowing that such bank, or association, or banker, is insolvent, is guilty of a misdemeanor. (Enacted February 14, 1872.) § 563. Every director, officer, or agent of any corporation or joint stock association, who knowingly receives or possesses himself of any property of such corporation or association, otherwise than in payment of a just demand, and who, with intent to defraud, omits to make, or to cause or direct to be made, a full and true entry thereof in the books or accounts of such corporation or association, and every director, officer, agent, or member of any corporation or joint stock association who, with intent to defraud, destroys, alters, mutilates, or falsifies any of the books, papers, writings, or securities belonging to such corporation or association, or makes, or concurs in making, any false entries, or omits, or concurs in omitting to make any material entry in any book of accounts, or other record or document kept by such corporation or association, is punishable by imprisonment in the state prison not less than three nor more than ten years, or by imprisonment in a county jail not exceeding one year, and a fine not exceeding five hundred dollars, or by both such fine and imprisonment. (Enacted February 14, 1872. See, also, Penal Code, section 558.) An indictment under section 563 above for making false entries in the books of a corporation must set out the particular entry, or state the substance of it according to its legal effect.20 But it is not necessary to set out how the entries could have resulted in defrauding the corporation; that is a matter of evidence under the allegation of intent.21 20 People v. Palmer, 53 Cal. 615. 21 People v. Leonard, 103 Cal. 200, 37 Pac. 222. It is not necessary that the false entries should be in a book or record of accounts; it is said this section is broad enough to cover any record or document which by law is ordered to be kept by a corporation for profit, and especially records containing business transactions in the nature of debt and credit, and that in a sense a minute book might contain memoranda of financial transactions.22 Sections 566 to 572 of the Penal Code are as follows: § 566. Every officer, agent, or stockholder of any railroad company, who knowingly assents to, or has any agency in contracting any debt by or on behalf of such company, unauthorized by a special law for the purpose, the amount of which debt, with other debts of the company, exceeds its available means for the payment of its debts, in its possession, under its control, and belonging to it at the time such debt is contracted, including its bona fide and available stock subscriptions, and exclusive of its real estate, is guilty of a misdemeanor. (Enacted February 14, 1872. See, also, Civil Code, sections 309, 456, 457.) § 567. The last section does not affect the validity of a debt created in violation of its provisions, as against the company. (Enacted February 14, 1872.) § 568. Every director of a corporation or joint stock association is deemed to possess such a knowledge of the affairs of his corporation as to enable him to determine whether any act, proceeding, or omission of its directors. is a violation of this chapter. (Enacted February 14, 1872.) § 569. Every director of a corporation or joint stock association, who is present at a meeting of the directors at which any act, proceeding, or omission of such directors, in violation of this chapter, occurs, is deemed to have concurred therein, unless he at the time causes, or in writing requires, his dissent therefrom to be entered 22 Ex Parte McKenney, 10 Cal. App. 357, 101 Pac. 927. |