Ms. Ma. Lourdes S. M. Estanislao

August 19, 1992 Ms. Ma. Lourdes S. M. Estanislao Iluminada Farms Inc. 113 Quirino Avenue Davao City M a d a m : This refers to your letter of July 26, 1992 requesting opinion on the following queries: 1. When the directors of a corporation receiving compensation as such directors, apart from per diem, receive also other compensation such as incentive bonus, consultant's fee, salary, without the benefit of the required approval or vote of the stockholders, should such other compensation be included in the ten (10%) percent limit prescribed in Section 30 of the Corporation Code? 2. When the directors of a corporation receiving compensation as such directors also serve as the officers of the corporation, should their salaries as officers of the corporation be included in the same ten (10%) percent limit prescribed in Section 30 of the Corporation Code? 3. Are the directors receiving compensation as aforesaid, apart from per diem, individually liable to return what they have received without the approval of the stockholders? If such had been the practice for a long time already, will this extinguish or mitigate the liability, if any, of the directors concerned? 4. If the compensation being received by the directors, apart from the per diem, have the tacit approval of the stockholders and do not exceed the ten (10%) percent limit prescribed in Section 30 of the Corporation Code, can this be considered legal even if it is not explicitly provided for in the by-laws of the corporation? If this has been the practice and if found to be improper or illegal, how can this be corrected or remedied? 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 diem: Provided, however, That any such compensation (other than per diem) may be granted to directors by the vote of 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) Under the aforecited provision, 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. Accordingly, in the absence of a provision in the by-laws or approval by the stockholders, directors are not entitled to receive compensation. As to what covers "total compensation",usually it includes salaries/remuneration, bonuses/gifts, or any incentive compensation for services rendered for the corporation. The phrase "in no case shall ...exceed ...in the above-cited provision connotes that the 10% limitation on the amount of compensation of directors does not admit an exception. The limitation is intended for the protection not only for the stockholders but also for the corporate creditors and prospective investors. Relative to compensation of officers, since, the Board of Directors appoints/elects the corporate officers, ordinarily then and as manager of the corporate affairs, it is within the Board's power to fix the salaries of the officers by way of a resolution to that effect. If there is such an authority, a director who is also an officer may collect a salary for his services done as an officer. The reason is that the offices of directors and officers have different functions. If a resolution fixing the salaries of officers is not tainted with irregularity and is not for the purpose of disposing of the profits of the corporation, the only question to be determined is whether the salary fixed is reasonable. Considering that the board of directors and officers have different functions, we believe that the above 10% limitation excludes salaries for services rendered by officers. Salaries to officers and directors, made without proper authorization, may ordinarily be recoverable in a stockholders' suit; where action by the corporation is prevented by the control of the majority stockholders, relief may be at the instance of minority stockholders themselves, there being no laches, acquiescence or other circumstances preventing relief, after demand has been made upon regular corporate management to act and it has refused, or unless it appears that a demand would be in vain and useless; and an accounting may be required of officers who have received salaries in excess of a fair and reasonable value for the services performed, or have breached their fiduciary duties. However, generally, the action of the directors will not be set aside by the courts on the suit of a minority stockholder unless the result is an oppression of the minority. Compensation is dealt with as an issue of business judgment to be questioned only in case of clear abuse. Such a cause of action is properly brought in a court of equity, and is common to all of the stockholders and is one for which one stockholder may sue for the benefit of all, but a derivative action by stockholders complaining of alleged excessive salaries voted by the directors to certain officers will be barred by laches, especially after the lapse of many years since the action complained of occurred. (5-A Fletcher Sec. 2171 citing several authorities) Please be advised accordingly. LexLib Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman