No easy exit: Key takeaways from the Cosette / Mayne Pharma decision

Ahead of the Deal - Australian M&A Briefing

The NSW Supreme Court has handed down its decision on the much-watched material adverse change clause (MAC) dispute between Mayne Pharma Group Limited and Cosette Pharmaceuticals¹, ruling decisively in favour of Mayne Pharma and denying Cosette's attempt to terminate the deal.

The judgment of Justice Black is an important one for Australian M&A. It provides rare and detailed guidance on the operation of MAC clauses, the efficacy of disclaimers, the interpretation of warranties regarding due diligence information, and the significance of an acquirer's post-signing conduct on the exercise of termination rights.

Following on from our previous examination of the Cosette - Mayne Pharma dispute and its potential implications for MAC clauses, we have set out the key lessons and takeaways that Australian dealmakers need to know.

1. The burden of proof: the challenge of demonstrating a MAC

The dispute centred on the interpretation and application of the MAC trigger under the SID. The relevant MAC definition, called "Mayne Material Adverse Change", referenced "[a]ny event, occurrence, change, circumstance or matter …  occurring before, on or after the date of [the SID] … which has... (either individually or when [aggregated]) … [the] effect of diminishing the consolidated Maintainable EBITDA over a 12-month period of the Mayne Group, taken as a whole, by at least A$10.76 million".  

Cosette sought to walk away from the deal, on the basis that Mayne's (arguably) material business underperformance in Q3 FY25 (compared to the historical trend and forecast), and a potentially significant regulatory issue asserted in a letter issued by the US Food & Drug Administration (FDA), constituted a Mayne Material Adverse Change.

The Court's decision demonstrates that proving a MAC can be a significant challenge for a bidder.

• Objective, not subjective: At the risk of stating the obvious, the Court affirmed that whether applicable events or circumstances can be 'reasonably expected' to meet the contractually specified threshold for a MAC is an objective threshold that "does not depend on what either party subjectively thought at the time". A bidder seeking to invoke a MAC and rely on it to terminate the deal must prove, on the balance of probabilities, that the adverse event or circumstance has, or is reasonably expected to have, the specified effect. Importantly, the focus is on actual events and their impact, not on missed forecasts or revised projections. As the Court observed, a downward revision of a forecast is not itself a MAC – it may be evidence of it (indicative of the underlying factual developments) but did not in this case constitute the adverse circumstance.
• No room for buyer’s remorse: Short-term fluctuations, market volatility, or even significant underperformance against budget may not amount to a MAC. The Court’s approach is to look for a sustained, material adverse effect on the target’s business, not mere change in sentiment. The decision makes clear that the evidentiary burden is high: the impact must be identified, quantified, and shown to meet the agreed threshold, in isolation from other economic developments (and excluding carve-outs, such as industry-wide events or matters fairly disclosed). Similarly, an unfavourable letter from a regulator – especially where the regulator's assertions are not accepted – is neither, a MAC nor disclosable under the continuous disclosure rules. Its materiality is not to be assumed and both its content and consequences must be taken into account.
• The proof problem: In practice, this means that even where a business' performance suffers a sharp downturn, unless the cause and effect can be clearly linked and the quantum established by reference to the thresholds, a MAC claim may fail. The Mayne Pharma case involved what appeared to be a significant earnings downgrade and potentially significant regulatory headwinds, yet those matters were not sufficient to trigger a "Mayne Material Adverse Change".  Careful drafting of the MAC clause is only one part of the equation. The facts tested against it must, objectively and independently, meet the defined thresholds. 

2. Claiming reliance on the unreliable: warranties, disclaimers and disclosures

The interplay between warranties and disclaimers in the context of information provided in a data room (or otherwise made available in due diligence) is a perennial source of M&A-related disputes. The Mayne Pharma judgment provides important guidance on how these provisions are to be read and applied.

• Warranties in context: Warranties as to due diligence materials are typically framed as assurances that the data room (or equivalent) has been collated and prepared with reasonable care and in good faith. The Court made clear that such warranties do not amount to a guarantee of the accuracy of every document or statement (including any forecast) within the data room. Rather, they are directed to the process and integrity of the information package "as a whole". This means that it may be difficult to rely on such a warranty to claim against a specific error in a data room document.
• Disclaimers hold the line: Crucially, the Court upheld the efficacy of explicit disclaimers regarding forecasts, projections, and other forward-looking statements. Where the SID includes a disclaimer that no warranty was given as to the accuracy or achievability of forecasts, a party – and particularly a sophisticated bidder that should well understand that "a forecast of a complex business that disclosed risks and opportunities" cannot be boiled down to "an expectation of a single figure" – cannot circumvent this agreed position by pointing to more general warranties about the data room or due diligence materials.
• Fair disclosures fare well: The judgment also noted that while there had been a decline (relative to forecasts) in Mayne Pharma's EBITDA in January 2025, this had been fairly disclosed in the due diligence materials made available in the data room, including cash flow figures – and so were not available to Cosette to establish that a MAC had occurred. It highlights the need for a bidder to review and carefully assess every document that is disclosed to it via a data room (or otherwise).

3. Stick or twist: the dilemma faced by a bidder reserving its right to terminate a deal

Perhaps the most significant practical lesson from the judgment is the operation of the doctrine of election, and the risks for a bidder who acts inconsistently with an intention to terminate.

• Affirmation by conduct: If a party, with knowledge of facts giving rise to a purported right to terminate, acts in a manner consistent only with affirming the contract, it could risk giving up the ability to exercise that right. The Court regarded Cosette’s entry into an amendment deed to the SID (which expressly confirmed that the SID remained in full force and effect) as conduct which was “wholly inconsistent with any intention to terminate” and amounted to an election to affirm the contract.
• Court proceedings and scheme support: Similarly, the acquirer’s conduct in supporting the scheme at the first court hearing (including by seeking leave to appear), in not disclosing in its section of the scheme booklet any intention to terminate (other than on expressly reserved grounds), and allowing at the first court hearing the reading of affidavits that confirmed the accuracy and completeness of that scheme booklet disclosure, was held to amount to an election to affirm the SID. The Court emphasised the public and procedural significance of this conduct, particularly given the impact on shareholders and the Court’s reliance on the parties’ disclosures and representations.
• 'Anti-waiver' clauses no shield: Attempts by Cosette to point to the 'anti-waiver' clause in the SID, which required that any waiver of a right under the SID be in writing and that a failure to exercise or delay in exercising a right under the SID does not operate as a waiver, were ineffective. The Court held that such contractual provisions do not override election by affirmation where positive acts are taken that are inconsistent with termination.
• Use it or lose it: For bidders, this creates a real tension. The SID will often require the bidder to support the scheme and participate in court processes, even as it considers its termination rights. In practical terms, this means that a bidder that receives information that it considers may amount to a MAC in the lead-up to the first court hearing for a scheme, or other key event or milestone (such as a proposed amendment to the SID), may well need to make a prompt decision as to whether or not it wishes to continue to pursue the deal. Delay, or equivocal conduct, may be fatal to the bidder's ability to assert a MAC or attempt to exercise other termination rights.

Conclusion: Courts will hold bidders to their bargains

Taken together with its 2022 decision regarding the terms of the SID between Perpetual and Pendal, the NSW Supreme Court's decision makes it clear that Australian courts will not lightly allow a proposed acquirer under a scheme of arrangement to walk away from its public commitments to proceed with the transaction. It also demonstrates that any bidder seeking to rely on claims of a MAC to do so will need to provide specific and objective evidence to prove that a material adverse change has in fact occurred.

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