Ontario Commission des P.O. Box 55, 19th Floor CP 55, 19e étage Securities valeurs mobilières 20 Queen Street West 20, rue queen ouest Commission de l’Ontario Toronto ON M5H 3S8 Toronto ON M5H 3S8 IN THE MATTER OF THE SECURITIES ACT, R.S.O. 1990, c. S.5, as amended -AND- IN THE MATTER OF BIOVAIL CORPORATION, EUGENE N. MELNYK, BRIAN H. CROMBIE, JOHN R. MISZUK and KENNETH G. HOWLING REASONS AND DECISION Hearing: March 4, 5, 6, 9, 10, 11, 12, 30 and 31, 2009 April 1, 2, 3, 6, 7, 8, 9, 13, 14, 15, 22, 24, 25 and 26, 2009 June 22, 24, 25 and 26, 2009 Decision: September 30, 2010 Panel: James E. A. Turner - Vice-Chair and Chair of the Panel David L. Knight, F.C.A. - Commissioner Paulette L. Kennedy - Commissioner Counsel: Kent E. Thomson - For Eugene N. Melnyk James Doris Sean Campbell Johanna Superina - For Staff of the Ontario Securities Alexandra Clark Commission Caitlin Sainsbury TABLE OF CONTENTS I. INTRODUCTION..............................................................................................................................................1 II. BACKGROUND ................................................................................................................................................2 A. THE BIOVAIL PARTICIPANTS IN THE HEARING ...........................................................................................2 (i) Biovail and Biovail Laboratories Incorporated ..................................................................................2 (ii) Melnyk ...............................................................................................................................................2 (iii) Other Senior Officers of Biovail ........................................................................................................2 B. BACKGROUND FACTS....................................................................................................................................3 (i) The GSK Agreement ..........................................................................................................................3 (ii) Biovail Earnings Guidance.................................................................................................................4 (iii) FDA Approval of WXL......................................................................................................................4 (iv) The Accident ......................................................................................................................................4 (v) The October 3 Release........................................................................................................................5 (vi) The Analysts Call ...............................................................................................................................6 (vii) The October 8 Release........................................................................................................................7 (viii) The Roadshows ..................................................................................................................................8 (ix) The October 30 Release......................................................................................................................8 (x) The March 2004 Release....................................................................................................................9 C. POSITIONS OF THE PARTIES........................................................................................................................11 (i) Staff ..................................................................................................................................................11 (ii) Melnyk .............................................................................................................................................12 III. THE ISSUES ....................................................................................................................................................13 IV. ANALYSIS .......................................................................................................................................................14 A. THE STANDARD OF PROOF..........................................................................................................................14 B. MATERIALITY OF STATEMENTS .................................................................................................................14 (i) Materiality Generally........................................................................................................................14 (ii) “Material Change” and “Material Fact” ...........................................................................................16 (iii) The Reasonable Investor Standard ...................................................................................................17 (iv) The Meaning of “In a Material Respect”..........................................................................................17 (v) Conclusion as to the Appropriate Materiality Standard....................................................................18 C. THE EVIDENCE ............................................................................................................................................19 (i) General Comments on the Evidence ................................................................................................19 (ii) Melnyk’s Testimony.........................................................................................................................20 (iii) Evidence of the GSK Witnesses.......................................................................................................20 (a) Negotiation of the GSK Agreement........................................................................................................... 20 (b) GSK’s Pre-Launch Discussions with Biovail ............................................................................................ 20 (c) GSK’s Response to the Truck Accident Statement.................................................................................... 21 (d) Amendment of the GSK Delivery Term .................................................................................................... 22 (iv) Evidence of the Ernst & Young Witnesses.......................................................................................23 (a) Reaction to the October 3 Release ............................................................................................................. 23 (b) The October 8 Release, October 30 Release and March 04 Release.......................................................... 25 (c) Conclusions as to the Evidence of the Ernst & Young Witnesses.............................................................. 26 D. WAS THE ACCIDENT CONTRIBUTION STATEMENT MISLEADING OR UNTRUE?.......................................26 (i) Positions of the Parties .....................................................................................................................27 (ii) Analysis............................................................................................................................................28 (a) Biovail’s Usual Delivery Term .................................................................................................................. 28 (b) Miszuk’s Immediate Response to the Accident ......................................................................................... 29 (c) The Draft Release ...................................................................................................................................... 29 (d) The Thompson Opinion ............................................................................................................................. 30 (e) Interpretation of the GSK Delivery Term .................................................................................................. 30 (f) Biovail’s Revenue Recognition Policy ...................................................................................................... 31 (g) Deeth’s Testimony..................................................................................................................................... 32 (h) Amendment of the GSK Delivery Term .................................................................................................... 33 (i) Miszuk’s View of the Circumstances by the End of October .................................................................... 33 (iii) Conclusions ......................................................................................................................................34 E. WAS THE REVENUE LOSS STATEMENT MISLEADING OR UNTRUE?..........................................................35 (i) Positions of the Parties .....................................................................................................................35 (ii) Analysis............................................................................................................................................36 (a) Bulk Trade Shipment ................................................................................................................................. 36 (b) Biovail Estimates After the Accident......................................................................................................... 38 (c) Market Response.......................................................................................................................................