June 25 (Bloomberg) -- Biovail Corp.'s fight for control with founder Eugene Melnyk heads for court next month after a day in which Melnyk tried to block a board election, lost the vote and threatened to start a competing drug company.

Shareholders of Biovail, Canada's largest publicly traded drugmaker, elected a company-backed slate of directors at a Toronto meeting. Melnyk, the Mississagua, Ontario, company's largest stockholder, immediately sued, saying the current board's decision to change bylaws just before the vote was illegal. Ontario Superior Court set a July 8 hearing.

Biovail has lost more than half its value on the New York Stock Exchange since Melnyk, 49, resigned in June 2007 amid U.S. allegations of securities fraud and improper marketing. During months of campaigning, the company and Melnyk touted competing strategies to combat flagging sales of Biovail's two big sellers, the antidepressant Wellbutrin XL and blood pressure medicine Cardizem LA.

The bylaw change was ``a ghastly case of breaking every corporate governance rule in the book,'' Melnyk said at a news conference in Toronto. ``It is dirty pool for people who have piously claimed the high ground.''

Melnyk said he'd start a new company with $50 million to $100 million of his own money if he loses in court and Biovail's new directors are seated.

Biovail, in its own statement, said Melnyk attempted to ``circumvent the democratic process'' of the proxy vote.

'A Distraction'

``Once again, Mr. Melnyk is putting his own self interests above those of Biovail's other 56,000 shareholders,'' the company said. Melnyk's actions were ``a further waste of shareholder money and a distraction to the company.''

Biovail fell 8 cents to $10.68 at 4:15 p.m. in composite trading. The company's shares dropped 57 percent in the last 12 months.

The broadsides capped a day that began with the Biovail shareholder meeting, at which Melnyk pulled his proxies and then withdrew his slate of nominees to protest the bylaw change. The vote went ahead, with 98 percent of shareholders backing a company slate led by current chairman Douglas Squires and five new directors.

Squires told shareholders at the meeting that Melnyk withdrew his proxies 10 minutes before the session was scheduled to start in an attempt to scuttle the vote. The company's bylaws required 51 percent of shares to be represented at any meeting. The board changed that to 25 percent at today's meeting, then tallied the votes.

'Unconsionable'

``This latest desperate attempt to thwart the will of the shareholders is unconscionable,'' Squires said in an interview after the meeting. The shareholders' vote was ``an overwhelming mandate for change for Biovail, which is desperately needed and has been needed for years,'' he said.

Melnyk said he withdrew his votes only after another shareholder, who wasn't identified, revoked 6.3 million proxies for the management slate. That suggested momentum was shifting in his favor so he pulled his proxies to delay the vote, he said.

Biovail, in its statement, said the first proxies were withdrawn as a ``correction of a clerical error.''

Biovail's first-quarter profit dropped 40 percent on lower sales of Wellbutrin and Cardizem. William Wells, the former supermarket executive who took over as CEO May 1, said Biovail will shut its Puerto Rico plants and fire 250 workers as part of a plan to develop drugs for central nervous system disorders, including Parkinson's disease and multiple sclerosis.

'Pharmaceutical Suicide'

Melnyk called the plan ``absolute pharmaceutical suicide.'' Biovail's Puerto Rico plants are critical for manufacturing capacity and the market for central nervous system drugs is too crowded to be profitable, he said in an interview June 2.

Melnyk's 10 candidates instead recommended investing in generic drugs, reformulating existing products and developing genetically engineered biotechnology drugs, according to his slate's proxy filing.

The company's plan to develop nervous system drugs is ``risky'' because of the time and cost it would take, Claude Camire, an analyst with Paradigm Capital Inc. in Toronto, said in a telephone interview before the vote.

``They haven't been able to fill the gap left by the generics,'' Camire said on June 23. ``Obviously, the product has been declining since then. Unfortunately, they haven't been able to replace that with a blockbuster product and they haven't acquired a new company and they haven't really come up with anything to placate investors.''

Ottawa Senators

Melnyk owned 11 percent of the company's shares valued at $193 million on June 2, according to Bloomberg data. He also owns the National Hockey League's Ottawa Senators.

In March, Melnyk and three other executives were accused by U.S. regulators of fraud, partly for blaming a missed earnings forecast in 2003 on a fatal accident involving a truck hauling Wellbutrin. After Melnyk's departure last year, Biovail also settled a criminal probe and investor class-action lawsuit over Cardizem marketing.

Melnyk's resigned from Biovail for ``personal reasons'' that had nothing to do with the legal issues, Seth Faison, a Melnyk spokesman, said in an e-mail.

To contact the reporters on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net; Kevin Bell in Toronto kbell2@bloomberg.net.

Last Updated: June 25, 2008 17:50 EDT