Canada: OSC Releases Decision in Melnyk Case

Last Updated: October 15 2010
Article by John Connon

On September 30, 2010, the Ontario Securities Commission released its decision in the case against Eugene Melnyk, the founder and former Chairman and Chief Executive Officer of Biovail Corporation. OSC Staff had alleged that:

  • statements made by Biovail regarding the financial implications of an in-transit loss of a valuable shipment of pharmaceuticals were, in a material respect and at the time and in the light of the circumstances under which they were made, misleading or untrue,
  • Mr. Melnyk had authorized, permitted or acquiesced in Biovail's alleged misstatements, and
  • Mr. Melnyk had thereby violated Ontario securities law and engaged in conduct contrary to the public interest.

A three-member panel of the OSC concluded that although Mr. Melnyk had not contravened Ontario securities law, his conduct was contrary to the public interest.

Background

On September 30, 2003, three trucks left Biovail's manufacturing facility in Manitoba carrying a substantial amount of Wellbutrin XL, an anti-depressant drug manufactured by Biovail for delivery to a customer in North Carolina. The following afternoon, one of the trucks was involved in an accident outside Chicago, resulting in the damage to a portion of the truck's shipment.

Two days later, Biovail issued a press release announcing that preliminary results for its third quarter indicated that revenues for the quarter would be below previously- issued guidance and that the loss of revenue and income associated with the loss of the Wellbutrin shipment had contributed significantly to this unfavourable variance. Bioval estimated that the revenue associated with the shipment was in the range of $10 to $20 million. The OSC panel determined that the statements were misleading and untrue, that Biovail repeated these statements in subsequent press releases and analysts' calls and that Biovail failed to clarify the statements in subsequent disclosures. Biovail eventually reported in March 2004 that the actual revenue loss from the accident was $5.0 million, though it did not make clear that the accident affected its fourth quarter results and not those of its third quarter.

In its decision, the panel concluded that:

  • there was a substantial likelihood that a reasonable investor would have considered these statements, taken together, important in making an investment decision with respect to Biovail's shares,
  • Mr. Melnyk knew or should have known by the time the second press release referencing the accident (issued five days after the initial release) was issued:
    • that any revenue attributed to the Wellbutrin shipment was properly attributable to the fourth quarter under the contract governing the shipment and the accident could not have impacted Biovail's third quarter financial results, and
    • that the $10 to $20 million estimate of the revenue associated with the shipment was misleading or untrue, and
  • Mr. Melnyk knew or should have known that Biovail's statements were, in a material respect and at the time and in the light of the circumstances under which the statement was made, misleading or untrue.

Notwithstanding this finding, the panel concluded that Mr. Melnyk did not contravene Ontario securities law as the press release in which the materially misleading or untrue statements were repeated was not, at that time, required to be filed under Ontario securities law (which is an essential element of liability under Section 122(1) of the Ontario Securities Act).1 Nonetheless, the panel exercised the Commission's public interest jurisdiction under Section 127 of the Securities Act to find that Mr. Melnyk's conduct was contrary to the public interest.

"...in a material respect" – the Reasonable Investor Standard

Under Section 122(1) of the Securities Act, a statement in a document required to be filed or furnished must be misleading or untrue in a material respect in order for it to contravene securities laws. The Melnyk decision is noteworthy for the statement by the OSC that the appropriate standard of materiality for a document, such as a press release, that is a disclosure document intended to be relied upon by investors in making investment decisions is the "reasonable investor" standard. Under this standard, a statement would be material if there is a substantial likelihood that a reasonable investor would consider it to be important in making an investment decision. The Commission cautioned that its adoption of this standard in the Melnyk matter should not be interpreted as suggesting that the reasonable investor standard is the only appropriate standard of materiality for purposes of Section 122(1). The circumstances in which the words "in a material respect" apply will vary and those circumstances may require a different standard of materiality.

Interestingly, the adoption of the reasonable investor standard could be interpreted to result in a lower threshold for quasi-criminal liability under Section 122(1) of the Securities Act 2 than for civil liability under Part XXIII (addressing prospectuses, etc.) or Part XXIII.1 (addressing secondary market disclosure). For a statement to attract civil liability, it must relate to a fact that would reasonably be expected to have a significant effect on the market price of an issuer's securities. By contrast, for a statement to fall under the scope of Section 122(1) and potentially result in a person being subject to a fine, imprisonment or both the statement need only be important to an investor in making an investment decision (which does not necessarily mean that it should reasonably be expected to have a significant impact on market price).

Disclosure and Public Interest Jurisdiction

The OSC's decision in the Melnyk case also illustrates the breadth of its interpretation of its public interest jurisdiction under Section 127 of the Securities Act. The panel cautioned that there should be no doubt in the minds of market participants that the Commission is entitled to exercise its public interest jurisdiction where any inaccurate, misleading or untrue public statement is made, whether or not that statement contravenes Ontario securities law.

The Melnyk decision affirms the Commission's view that:

  • there is a public interest in ensuring that all public statements made by reporting issuers and others are accurate and not misleading or untrue and can be relied upon by investors in making investment decisions,
  • there must be a reasonable basis for any forward-looking information or estimate and, if there is significant uncertainty with respect to a statement, that uncertainty should be specifically disclosed and discussed,
  • the inclusion in a press release of a general "safe harbour" warning that any forward-looking information contained in such release is subject to risks and uncertainties will not protect a statement in the press release from allegations that it was misleading or untrue in a material respect, and
  • more is expected of officers and directors with superior qualifications, such as experienced business people, and more is expected of inside directors who have much greater involvement in corporate decision-making and much greater direct access to corporate information.

Footnotes

1. National Instrument 51-102 has since been amended to require that reporting issuers file a copy of any news release issued by it that discloses information regarding its historical or prospective results of operations or financial condition for a financial year or interim period. That section came into effect on March 31, 2004, after the events that gave rise to the Melnyk proceeding, and therefore had no application in that proceeding.

2. A breach of Section 122(1) of the Act is punishable by a fine of up to $5 million and/or a prison term of up to five years less a day

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions