Atty. Dario C. Rama

December 1, 1983 Atty. Dario C. Rama Suite 304-Security Bank Bldg. R. Magsaysay Ave., Davao City Sir : This refers to your letter dated July 7, 1983 endorsed by the SEC Davao Extension Office on the same date seeking clarification of the last sentence of Section 30 of the Corporation Code, quoted hereunder: ". . . In no case shall the total yearly compensation of directors, as such directors, exceed ten (10%) per cent of the net income before income tax of the corporation during the preceding year." It appears that the board of directors of Davao Central Chemical Corporation passed a resolution, ratified by the stockholders, granting 5% of the net earnings of the company as management bonus for the current year payable on a quarterly basis. You want to know the validity of this resolution considering that the above-quoted provision of the Corporation Code speaks of net income earned during the preceding year. Section 30 of the Corporation Code empowers the stockholders representing majority of the outstanding capital stock to grant compensation subject to the condition that said compensation does not exceed "ten (10%) per cent of the net income before income tax of the corporation during the preceding year". The validity of the resolution subject of your query will be tested on whether or not the yearly total compensation granted thereon does not exceed the limitation imposed in the said section. It is believed that as long as the actual amount of the total yearly compensation paid to the directors, in their capacity as directors of the corporation (inclusive of the 5% bonus) does not exceed 10% of the net income, before income tax, of the corporation during the preceding year, the payment of the yearly 5% management bonus, would not be considered violative of Sec. 30 of the Corporation Code. However, it may be noted that your mode of payment, i.e. quarterly basis will be difficult to observe since the 5% of the net earnings for the current year can be determined only when the calendar year or the fiscal year of the corporation ends. In view thereof, and to avert accounting problems, it is suggested that the computation provided aforecited section be followed. cdlex Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman