Corporate governance: Offside

Biovail investors blow the whistle on company founder.

At the beginning of this year’s hockey season, many fans tagged the Ottawa Senators as the team most favoured to breeze into the playoffs and maybe even take home the Stanley Cup. But as the regular season draws to a close, the team owned by Biovail Corp. founder Eugene Melnyk has stumbled badly and — by the time you read this — may be out of the playoffs entirely.

Melnyk finds himself in a similar situation. Last month, the former chairman and CEO of the pharmaceutical producer, who still owns about 11% of its shares (TSX: BVF), was poised to wage a proxy battle that could wrest control of the underperforming company from its current managers and directors. Of course, that was before the U.S. Securities and Exchange Commission and the Ontario Securities Commission filed damning civil complaints against Biovail, Melnyk and three other current or former company executives accusing them of widespread accounting fraud and lying to investors, analysts and regulators.

Biovail settled with the SEC and agreed to pay US$10 million in fines and penalties. But Melnyk isn’t going down without a fight. “I intend to vigorously contest the absolutely false allegations…and am confident that I will prevail once all the facts are heard.” At a court hearing later this month, Melnyk’s lawyers will try to stop Biovail from commenting on his attempt to oust its current board.

Whether Melnyk will be successful in either challenge remains to be seen. Biovail shareholders, however, seem to be taking a skeptical view, says J. Richard Finlay, founder of the Centre for Corporate and Public Governance. “Biovail’s stock dropped when Mr. Melnyk announced his plans to replace the board and fell again when the SEC and OSC actions were made public,” he says. “The market seems to be sending Mr. Melnyk a message about his future involvement.”