For more than a decade, Biovail ( BVF) CEO Eugene Melnyk has partnered with an independent member of the Canadian drug company's board of directors in various horseracing business ventures. The personal business relationship between the two men -- not a secret, but never specifically disclosed by Biovail to shareholders -- raises concerns over potential conflicts of interest and possibly violates New York Stock Exchange listing requirements for independent directors, according to legal and corporate governance experts. A closer look at its other board members also raises the issue of whether the Biovail board is as independent as it might seem.

Biovail, Canada's largest publicly traded drugmaker, acknowledges that its CEO Melnyk and the outside board member in question, Wilfred Bristow, do co-own racehorses, including one champion thoroughbred, Archers Bay, that in 1998 won the ultra-prestigious Queen's Plate, Canada's version of the Kentucky Derby.

But despite this connection, "Biovail considers all five of our outside directors to be independent under guidelines spelled out by NYSE listing requirements," says Ken Howling, Biovail's vice president of finance. That includes Bristow, a semi-retired stockbroker and director of the company since 1993. Bristow is also one of three Biovail directors on the board's executive compensation committee, which means he helps set the annual salary and bonuses of his business partner, CEO Melnyk.

Defining Independence

Under NYSE listing requirements, bolstered last year after a string of corporate scandals, independent directors must constitute a majority on a company's board. And to be deemed independent, directors are not allowed to have any business connections with the companies they serve. But whether the Big Board's corporate governance rules address personal business relationships between management and directors is not entirely clear, corporate governance experts say.

Still, these experts say that when a chief executive and a member of his board of directors jointly own an asset as potentially lucrative as a champion thoroughbred racehorse, it's hard to envision how the director can remain impartial in his role as a shareholder watchdog.

"At the very least, this situation is a loophole that shouldn't be allowed," says Nell Minow, editor of the Corporate Library, an independent research firm specializing in corporate governance issues. "The law should make sure there is no conflict of interest, but in this case there clearly is."

Times have been tough for Biovail. The stock has dropped 60% in the past 12 months due to a year's worth of financial restatements, allegations of aggressive marketing and accounting practices, and an alphabet soup of regulatory inquiries, including an ongoing investigation by the Securities and Exchange Commission. Biovail closed Friday at $18.90.

For its part, Biovail says it is committed to boosting its level of disclosure and becoming more financially transparent in order to get back into the good graces of investors. At its annual shareholder meeting June 25, Melnyk stressed, as he has in the past, that 2004 is a key transition year for Biovail in which the company is focusing on improving cash flow, reducing short-term debt and enhancing investor confidence.

Additional Connections

But a focus on Biovail's board of directors and its corporate governance policies is not likely to make investors feel any better. Camelback Research Associates, a boutique research firm that provides earnings-quality research to institutional clients, issued a warning to clients last week about the horseracing ties that bind Melnyk and Bristow. The research firm says there are also additional connections between Biovail's CEO and other current outside directors that cast doubt on the independent status of the directors. Here are some of Camelback's findings:

  • Sheldon Plener, a Biovail director since 2002, is a senior partner at the law firm of Cassels Brock & Blackwell. But Plener is also Melnyk's personal corporate attorney, leading the negotiations to purchase the Ottawa Senators of the National Hockey League and Corel Centre hockey arena on behalf of Melnyk. Plener serves as a director, secretary and "Alternate Governor" of the Senators and a director and secretary of the Corel Centre. He's also on the board of directors of St. Michael's Majors, a prep-school hockey club owned by Melnyk, according to Plener's biography on the Cassels Brock Web site.

  • Michael Van Every, a partner with PricewaterhouseCoopers, was elected as a Biovail director at its June 25 shareholder meeting and will head the board's audit committee. But Van Every and Melnyk also run in the same horseracing circles. Van Every is a steward of the Ontario Jockey Club; Melnyk is one of 70 members of the same club, according to a 2004 club roster. Van Every also owns a racehorse, Archers Bow, whose sire is Melnyk's Archers Bay.

Last week's Camelback report also gave Biovail a failing grade. "We ... fail to see how investors can place any sort of trust in the company's leadership as it attempts to address its numerous accounting anomalies and earnings quality deficiencies," the report states.

According to Canadian press reports, Melnyk and Bristow first met at an Ontario racetrack in 1989. At the time, Melnyk was just starting to build Biovail, then known as Trimel Corp.; Bristow was a stockbroker with a Canadian investment bank. Both men were also horse owners. Soon after they struck up their friendship, Melnyk and Bristow were co-investing in racehorses.

One of the horses co-owned by Melnyk and Bristow was Archers Bay, which captured two legs of the Canadian Triple Crown, the Queen's Plate and the Prince of Wales Stakes, in 1998. Archers Bay was named the top 3-year-old thoroughbred racehorse in Canada that year, and ultimately retired with more than $620,000 in winnings. Archers Bay then moved onto a lucrative second career as a stud before dying unexpectedly in 2002 after complications following surgery, according to media reports.

Today, Melnyk is one of Canada's wealthiest businessmen with a net worth of $1.4 billion, according to the 2003 Forbes ranking of the world's richest people. In addition to running Biovail, Melnyk owns a large thoroughbred horse farm in Ocala, Fla., and as mentioned above, owns the Ottawa Senators, an NHL franchise.

He and Bristow still co-own at least one racehorse: Kent Ridge, a son of Archers Bay, which finished near the back of the pack at this year's Queen's Plate, held June 28.

Biovail's Howling would not go into detail about Melnyk's horseracing activities. Bristow's daughter, Diana Bristow, a financial planner at BMO Nesbitt Burns, was asked to pass along a request to her father for an interview. The elder Bristow did not respond.

Ties That Bind

Lucian Bebchuk, a professor at Harvard University School of Law and the director of its corporate governance program, says the NYSE's listing requirements for independent directors do not directly address a situation in which a CEO and a director share substantial personal business interests, such a co-owning a thoroughbred racehorse. Instead, the rules bar an independent director from having a "material relationship" with the company.

But at the same time, Bebchuk says the financial ties between Melnyk and Bristow are so intertwined that it would be difficult to see how Bristow would be able to take a tough, independent stance against Melnyk, if it was called for.

"This case illustrates the myriad ties that can connect directors to executives," says Bebchuk. "It's likely that the rules the New York Stock Exchange has adopted are under-inclusive in terms of covering the full range of ties that might influence a director."

Corporate governance expert Charles Elson takes a more expansive view of the Big Board's rules.

"Independence speaks of financial relationships between a director, a company and management. This falls under that category," says Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware's business school. "The idea is that you should avoid business dealings between executives and directors. That's all. Avoid financial involvement. Then these questions wouldn't be asked."

Biovail's Howling, in an emailed response to further questions, says the company has taken extensive steps to ensure that its outside directors are independent. "Our outside legal council, Proskauer Rose , conducted a thorough review of each director and concluded that the outside directors are independent. This review was completed shortly before our annual shareholders meeting which was held June 25, so this is a recent review (i.e., the review has been done since the new rules and regulations that govern independence have been put in place)."

Howling did not say whether its lawyers examined specifically any personal business relationships between Biovail management and directors, such as the situation that exists between Melnyk and Bristow.

With respect to Van Every, Howling says, "There is no prior relationship between Melnyk and Van Every. They never met until four months ago, so that is a glaringly obvious statement unto itself."

Biovail's board of directors consists of seven members. Excluding Melnyk and Senior Vice President Rolf Reininghaus, there are five outside directors whom the company deems independent -- a majority.

But is Bristow really independent? If not, then that reduces Biovail's outside directors to four. Is Plener, Melnyk's personal corporate attorney, really independent? And what about Van Every? Remove even one of these latter two directors from the independent column and Biovail's board tips to a majority insider status, which would violate NYSE listing requirements.

A NYSE spokeswoman would not comment specifically on individual firms trading on the exchange.

Conflict of Interest?
Here's a look at connections between Biovail's CEO and current outside directors
Director Biography Ties to Biovail CEO Melnyk
Wilfred Bristow Director since 1993; vice president and senior investment advisor at BMO Nesbitt Burns since 1991; a former member of the Royal Canadian Mounted Police. Co-owns thoroughbred racehorses with Biovail CEO Eugene Melnyk, including a past winner of Canada's version of the Kentucky Derby.
Sheldon Plener Director since 2002; senior partner at Cassels Brock & Blackwell law firm; serves on the board of governors of the Ontario Hockey League. Works as Melnyk's personal corporate attorney; led negotiations to purchase Ottawa Senators and the Corel Centre for Melnyk, and serves on boards of both the Senators and Corel Centre.
Michael Van Every Director since 2004; partner at PricewaterhouseCoopers. Steward of the Ontario Jockey Club, of which Melnyk is a member. Owns a racehorse sired by one of Melnyk's champion horses.
Roger Rowan Director since 1997; president and COO of Watt Carmichael, a private investment firm. Board member of St. Michael's Majors prep school hockey team, owned by Melnyk.
Eugene Melnyk Chairman, CEO of Biovail. n/a
Rolf Reininghaus Senior Vice President, Corporate and Strategic Development, Biovail. n/a
Laurence Paul, M.D. Director since 2002, co-founder of Laurel Crown Ventures, an equity investment and buyout division of the Louis Berkman Co. Previously managing director at Donaldson Lufkin and Jenrette. No direct ties to Melnyk, but DLJ did underwrite two Biovail public offerings, in 1999 and 2000, during Paul's tenure.
Source: Biovail, Camelback Research Alliance, research
Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

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