Tuesday, June 14, 2011
An article in the Wall Street Journal today provides another opportunity to continue my rant regarding private benefit vs. private inurement. In my post below regarding Newt's Nonprofits, I argue that the facts raise a private inurement issue because the transactions, though effectuated via a quid pro quo exchange, involved an enrichment of an insider acting on both sides of the transaction. The WSJ article, on the other hand, involves the relationship between GAVI Alliance, a global vaccine charity, and unrelated private pharmaceutical companies. Observers criticize the charity, saying that it has too cozy a relationship with certain drug companies and those companies are benefiting from the sale of their pharmaceuticals to GAVI. It is the absence of an insider on both sides of the transaction, IMHO, that makes this a classic private benefit question. In Newt's case, the insider on both sides of what is otherwise a fair market value transaction raise the dangers more often associated with insider profit-making at the charity's expense; hence, Newt's case involves private inurement, GAVI involves private benefit. But enough about me! Here's an excerpt from the article; I think it makes for an interesting classroom case study:
LONDON—Large donations from the U.K., Norway and the Bill & Melinda Gates Foundation helped a global vaccine charity raise $4.3 billion at a summit Monday, exceeding its targets and allowing it to carry out all its immunization plans through 2015.
GAVI Alliance, the international vaccine agency, raised $600 million more than the $3.7 billion it had been seeking to plug a budget shortfall that threatened the agency's ability to fund its work. GAVI is one of the world's largest buyers of vaccines for poor nations.
Some relief groups such as Doctors Without Borders and Oxfam have criticized GAVI in recent weeks, saying it could make better use of its money by pushing pharmaceutical companies for lower prices. The groups have accused GAVI of having too cozy a relationship with drug companies, two of which sit on GAVI's 27-person board. GAVI has rebuffed this criticism, saying it needs to work closely with drug companies to keep vaccine supplies flowing.
Another online article spells out the concern with greater detail:
Particularly irksome to the relief agencies is a funding scheme, sponsored by GAVI, under which two multinational drug makers, GlaxoSmithKline and Pfizer, have agreed to sell 30 million doses annually for 10 years in exchange for $10.50 per child immunized, plus a subsidy of $225 million to each company.
Drug makers in developing countries have said they could sell similar pneumococcal vaccines at $6 per child, according to Doctors Without Borders, more than 40 percent less than the $10.50 per child currently being paid by GAVI before the subsidy.
Executive Director of the Doctors Without Borders Campaign for Access to Essential Medicines, Dr. Tido von Schoen-Angerer, called the new funding “great news.” But, he said, ”it’s very disappointing that the prices agreed with two big pharma companies will be too high for countries to afford when donor support is not, or is no longer, available.”
GAVI says it needs to cooperate with drug companies to keep vaccine supplies flowing, and the drug companies say their prices are much lower than those charged in Western countries.
At a news conference Monday, Bill Gates said he feels “great about the prices we’ve got” from drug companies, the Journal reported, but he added that he was eager to see new low-cost Indian and Chinese manufacturers accelerate their vaccine output.
If there is not an insider on both sides of the transaction, all we can really do is criticize the charity's business judgment, something we ought not do. In such cases, its really only a question of whether the private benefit is truly incidental to the charitable goal. And remember, sombody has to benefit particularly if everyone is going to benefit generally, that is just the nature of the capitalist world in which socialist charities operate. But wait! The WSJ article notes that insiders are in fact on both sides of the transaction, since two of the drug company execs sit on the charity's board of directors. So maybe this is more private inurement than private benefit. Tax law, of course, is administrable only to the extent we are able to rely on convenient proxies. For example, the presence of an insider on both sides of the transaction is a useful proxy for the dangers underlying the private inurement/excess benefit transaction. The problem, one that is likely demonstrated by this case as opposed to Newt's case, is that proxies are not always accurate. There are indeed insiders on both sides of the transaction in this case but there are also 25 other unrelated directors who do not benefit from the transaction. In which case, I would argue that the private benefit doctrine is sufficient to police whatever impropriety observers are complaining about. In the absence of some check on the insider's control over both sides of the transaction, I would favor applying the stricter, private foundation like private inurement prohibition. That's my tap dance and I am sticking to it.