Corporation Law: The Revised Corporation Code of the Philippines - Sec 29

THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE III -  BOARD OF DIRECTORS/TRUSTEES AND OFFICE

Section 29. Compensation of Directors or Trustees.

In the absence of any provision in the bylaws fixing their compensation, the directors or trustees shall not received any compensation in their capacity as such, except for reasonable per diems: Provided, however, That the stockholders representing at least a majority of the outstanding capital stock or majority of the members may grant directors or trustees with compensation and approve the amount thereof at a regular or special meeting.

In no case shall the total yearly compensation of directors exceed ten percent (10%) of the net income before income tax of the corporation during the preceding year.

Directors or trustees shall not participate in the determination of their own per diems or compensation.

Corporations vested with public interest shall submit to their shareholders and the Commission, an annual report of the total compensation of each of their directors or trustees.


1. Rules on Compensation.

  • Section 29 contemplates the following rules: 

  1. The By-Laws may provide for a fixed compensation of the members of the Board of Directors/Trustees;
  2. If the By-Laws does not provide for the directors'/ trustees' compensation, compensation may be granted to the directors/trustees by the vote of the stockholders representing at least a majority of the outstanding capital stock or by the majority of the members in case of a non-stock corporation; 
  3. Even if the By-Laws does not provide for compensation, the directors/trustees are still entitled to reasonable per diems;
  4. The total compensation of directors shall not exceed 10% of the net income before income tax of the corporation during the preceding year;
  5. Directors or trustees shall not participate in the determination of their own per diems or compensation; and 
  6. Corporations vested with public interest shall submit to their shareholders and to the SEC, an annual report of the total compensation of each of their directors or trustees.

  • Section 29 of the RCCP expressly provides that directors or trustees shall not participate in the determination of their own per diems or compensation.
  • This rule falls within the broader concept of self-dealing director. 
  • The rule is consistent with the director's trustee's duty of loyalty.

2. No Salary.

  • Therefore, directors or trustees are not entitled to salary or other compensation when they perform nothing more than the usual and ordinary duties of their office. 
  • This rule is founded upon a presumption that directors/trustees render services gratuitously, and that the return upon their shares adequately furnishes the motives for service, without compensation. 

3. Per Diem.

  • The term "per diem" is limited to pay for a day's services. 
    • They are allowances of money for expenses each day. 
  • The power of the directors to fix per diems for themselves emanates from the statute itself. 
  • On the other hand, the word "compensation" does not imply an immediate payment. 
    • It does not imply an immediate or direct return or the payment of cash fare or its equivalent. 
    • The rule was carried-over from the Corporation Code. 
  •  As intended by the legislators who enacted the Corporation Code, th tErm "compensation" is treated as synonymous with "salary."
    • Compensation therefore includes:
      • salaries
      • remunerations,
      • bonuses, 
      • gifts or 
      • any incentive for services rendered for the corporation.
  • The corporation, through the Board of Directors, may insure the lives of the directors and make the proceeds payable to them as beneficiaries instead of the company. 
    • The premium paid thereon is analogous to a continuing bonus or gift and thus falls within the context of additional compensation.
    • Compensation includes Christmas gifts that are given to the directors as well as bonuses extended to them. 
  • In the absence of provisions in the By-Laws, the Board may fix the amount of their per diems. 
    • The per diem of the directors may vary from year-to-year provided the same is reasonable. 
    • The stockholders are afforded relief if, upon review, they determine that the per diem given by the Board is not reasonable.
  • A provision in the By-Laws of a corporation providing for a Pl,000.00 per diem for every Board meeting is valid. The directors are allowed to receive only per diems of Pl,000.00 for every meeting that they actually attended. However, the Board of Directors may increase or decrease the amount of per diems when prevailing circumstances shall warrant. No other compensation may be given to them, except only when they serve the corporation in another capacity.
4. Limitations. 
  • The 10% limit means that the compensation can be given only if there are profits. 
    • The intent of the legislators is that if the corporation did not earn profits, the directors may not be given salaries except reasonable per diems. 
    • The limitation is intended for the protection not only of the stockholders but also of the corporate creditors and prospective investors. Hence, the same should be strictly observed. 
  • "Net income before income tax of the corporation during the preceding year" 
    • refers to the net income of the year during which the director served.
    • Thus, if he served in 1979, the net income for said year would be determined only after the end of the year or in 1980. 
    • As intended by the legislators, the compensation of the director is paid at the end of the year and he is paid his proportionate share for the period that he has served as director.
    • The compensation shall be recognized as an expense on the period it was incurred (when the director served).
  • The Board, subject to ratification of the stockholders, may provide for bonuses. However, the total compensation, inclusive of the bonus, shall be subject to the 10% threshold.
5. Trustees.
  • Section 29 of the RCCP applies to the members of the Board of Trustees. 
  • While members of non-stock, non-profit corporations are not supposed to receive part of the income of the corporation, they may be given compensation if they actually render services to the corporation as when they are acting as directors, officers or employees of the corporation. 
6. Compensation of Officers.
  • With respect to the officers, the Board may fix their compensation. 
    • It is within the power of the Board to fix the salaries of the officers by way of a resolution. 
    • However, resolutions of the Board fixing the compensation of officers are prospective in application.
    • The salaries of officers are not covered by the 10% limit under Section 29 of the RCCP. 
  • If a resolution of the Board 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.
    • Compensation is dealt with as an issue of business judgment to be questioned only in case of clear abuse.
  • A director is also entitled to receive a salary if he is performing functions as an officer. In such a case, the salary that he receives as an officer is not subject to the restrictions on the compensation of directors under Section 29 of the RCCP (previously, Section 30 of the Corporation Code).
7. Remedy in case of abuse. 
  • The remedies in case of clear abuse of discretion to give salaries or in case of compensation or per diems that are contrary to the provisions of the RCCP include a derivative suit.
  • Thus, a per diem given without proper authorization or is unreasonably excessive may ordinarily be recovered in a stockholder's/member's suit.
  • This giving of excessive compensation or allowances is a breach of the directors' duty of loyalty. 

PROBLEM:
After many difficult years, which called for sacrifices on the part of the company's directors, ABC Manufacturing, Inc. was finally earning substantial profits. Thus, the President proposed to the Board of Directors that the directors be paid a bonus equivalent to 15% of the company's net income before tax during the preceding year. The President's proposal was unanimously approved by the Board. A stockholder of ABC questioned the bonus. Does he have grounds to object?
Yes, the stockholder has valid and legal grounds to object to the payment to the directors of a bonus equivalent to 15% of the company's net income. Section 29 of the Revised Corporation Code provides that the total annual compensation of the directors cannot exceed 10% of the company's net income before income tax during the preceding year. Moreover, the authority to grant a bonus/compensation to the directors lies with the stockholders, not the directors, pursuant to Section 29 of the RCCP. (1991 Bar)


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