Mr. O. P. Victorino

May 21, 1992 Mr. O. P. Victorino c/o Golden Ram Management and Development Corporation Mindanao Avenue, Quezon City Metro Manila S i r : This refers to your letter of May 20, 1992 requesting opinion on the queries posed therein: cdlex As stated, in a Directors meeting of Golden Ram Management & Development Corporation held on December 21, 1991 the Board approved a resolution granting Christmas gifts for a job well done to all employees, Officers and Board members the following sums, to wit: P1,000 - for all rank and file employees 2,500 - for Mr. Ruben Jacinto 2,500 - for Col. Ciriaco Seludo 5,000 - for all Board members At the time of the approval of the resolution, there was no provision for Directors' compensation in the by-laws of the Corporation, However, this was subsequently approved by the stockholders representing more than a majority of the outstanding capital stock at a general meeting on April 25, 1992. Further, you stated that the net income of the corporation for the preceding year ended December 31, 1990 amounted to only P240,000. Hence, it would appear that the total P55,000 paid to the 11 directors was in excess of 10% of P240,000 and therefore, a violation of Section 30 of the Corporation Code. Even if the 10% limit is applied to the income for the year 1991, the amount of P55,000 paid to the directors would again be in excess inasmuch as the income for that year before income tax amounted to only P422,690. Your queries are: llcd 1. Whether the subsequent stockholders approval of the Board resolution granting Christmas gift to the members of the Board satisfies the requirement of stockholders approval for directors compensation. 2. Whether the grant of Christmas gift totaling to P55,000 to the Board is in violation of the limitation of total compensation under Section 30 of the Corporation Code. The pertinent provision of the Corporation Code provides: SECTION 30. Compensation of directors . In the absence of any provision in the by-laws fixing their compensation ,the directors shall not receive any compensation, as such directors, except for reasonable per diems: Provided, however, That any such compensation (other than per diems) may be granted to directors by the vote of the stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholders' meeting. In no case shall the total yearly compensation of directors as such directors, exceed ten (10%) percent of the net income before income tax of the corporation during the preceding year ." (Emphasis supplied) cdll Thus, directors can receive compensation other than per diems, only if the by-laws fix the same, or should there not be any such provision in the by-laws, if the stockholders representing a majority of the outstanding capital stock agree to give it to them. Generally, any act of the board of directors or of any of the officers beyond the scope of their authority fixing or increasing compensation may be ratified by the stockholders, when the stockholders could have originally authorized such act. (5 A Fletcher Sec. 2139, citing several cases.) In the instant case, while the Board Resolution granting the gifts was subsequently approved by the stockholders, the validity of the resolution will also be tested on whether or not the yearly total compensation granted thereon does not exceed the limitation imposed on the above-cited provision. In this connection quoted hereunder is the pertinent portion of the Proceedings of the Batasan Pambansa on the Corporation Code (March 11, 1980) reflecting as to what constitutes "net income before income tax of the corporation during the preceding year." The cardinal rule of construction is to ascertain the intention and meaning of the legislature for the purpose of going effect thereto. (Martin, Statutory Construction, citing Macondray & Co. vs. Eustaquio, G.R. No. 43683, July 16, 1937, 64 Phil. 446; Daza vs. Villaroman, G.R. No. 46825, October 18, 1939, 69 Phil 12). Thus, in case of ambiguity and in order to determine the intent of the law, resource may then be had to legislative deliberation on the matter. The proceedings states, thus: "Mr. Legaspi. ... I am stating this amendment, Mr. Speaker, to obviate the necessity of requiring the courts to interpret what is meant by the term "net income of the preceding year." After I submitted such amendment, I have a discussion with the sponsor of the bill and I suggested a further amendment to take away the word " preceding year " as the basis of the income because, Mr. Speaker, if the directors have served for the year 1979, the year of their incumbency, the basis of the computation of the directors fee will be the year 1978. So that, Mr. Speaker, an anomaly would arise whereby a director who served only for the year 1979, and in that year the corporation suffered a loss would still be entitled to a directors' fee for the reason that the preceding year, which is 1978, the corporation had incurred a profit and the net income basis of his fee would be this year (1978).Thank you, Mr. Speaker. MR. ABELLO. Mr. Speaker, answering the objections of the Gentleman from Cebu, I wish only to advert to the fact that we are talking about net income for the year, yearly net income before tax. Let us suppose that a person serves as director of a corporation during 1979. He is not paid any compensation during 1979, except reasonable per diems, because the yearly net income for 1979 cannot be determined until after the end of the year .So, here comes 1980, when the net income for 1979 has been determined by not only the executives of the corporation but also by the internal and external auditors of the corporation, then in that case, the date of the payment to the directors is already during 1980 ;and therefore each director is paid his proportionate share of the yearly net income before tax for the year 1979 .If it is the fear of the Gentleman from Cebu that the net income before tax is too indefinite, because one does not refer to income tax, the committee would have no objection to inserting the words "net income" before income tax of the corporation during the preceding year. But the term " during the preceding year ",Mr. Speaker is not only fair. It is not only in accordance with common practice, but it is in accordance with practice of the accounting profession .Because, as I said, the compensation of the director for one year is paid after the end of that year, and he is paid his proportionate share during the period that he has served as director .If he had served as director, for example not for the full year but for part of the year, the provisions of the by-laws or the provisions of the resolution approved by the stockholders authorizing the compensation, could include, as it usually includes, a provision that where a director has not served during the full year but during only a portion of the year, then he shall get a proportion of the compensation corresponding only to the period during which he had served .It is because, of this, Mr. Speaker, that except for the amendment to insert the word "income" before the word "tax" at the end of the amendment, the committee cannot accept any other amendment (Emphasis supplied) It appears from the above Batasan deliberation that the basis for the limitation is the net income before income tax of the year during which the directors have served as such .As to what covers "total yearly compensation",usually it includes salaries/remuneration, bonuses/gifts, or any incentive compensation for services rendered for the corporation. Accordingly, if the Christmas gifts granted to the board of directors exceed the limitation imposed in the above provision of law as intended, the same can be questioned by any interested parties. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman