UPDATE 1-Biovail, Melnyk reach settlement in board battle

* Founder Eugene Melnyk to support company's board

* Biovail to appoint one of Melnyk's choices

* Shares up 2.4 percent at C$14.73 (Adds analyst comments, updates share price; in U.S. dollars unless noted)

By Scott Anderson

TORONTO, May 26 (Reuters) - Biovail Corp (BVF.TO) reached an agreement with its founder Eugene Melnyk that will help avoid another proxy battle like the one that disrupted its shareholder meeting a year ago.

Melnyk, the company's largest shareholder, agreed to back the company's nominees to the board. He also promised not to participate in a proxy battle or make a shareholder proposal at any time until after the 2010 shareholder meeting.

He will also withdraw two proposed nominees he was trying to get named to the board.

In exchange, Canada's biggest publicly traded drug company, agreed to appoint Frank Potter, one of Melnyk's choices, to the board and audit committee.

The company's annual meeting is scheduled for May 28 in Toronto.

Melnyk, the millionaire owner of the Ottawa Senators National Hockey League team, had battled with Biovail management over plans to shift the company's emphasis to new treatments for disorders of the central nervous system.

Instead, he pushed for an emphasis on the company's product pipeline, including a return to "difficult to manufacture" generic drugs, as well as acquiring more products and technologies.

Earlier this year, Melnyk had called for a special shareholders meeting to vote on two board nominees backed by him and on changes to the company's governance.

Melnyk, who stepped down as executive chairman in 2007, was seeking a vote on resolutions that he said would bring the company's corporate practice in line with recommendations from the Canadian Coalition of Good Governance.

"Our proposals in February 2009 for corporate governance reform and our proposed nomination of two world-class individuals for Biovail's board of directors were made solely to benefit all of the shareholders of the company I founded," Melnyk said in a release issued Monday night.

"I believe the agreement we reached with the company will do just that," he said.

"We are very pleased that we can now move forward and focus on the continued successful implementation of our new strategic focus through next year's AGM," Douglas Squires, Biovail's chairman, said in a release issued late on Monday.