High bar for material adverse change in M&A: Lessons from the Mayne Pharma / Cosette decision

In brief

On 15 October 2025, the NSW Supreme Court found that US pharmaceutical company, Cosette Pharmaceuticals, Inc. did not validly terminate its $672 million takeover of ASX-listed Mayne Pharma Group Limited.¹ Justice Black found in favour of Mayne Pharma, which sought to enforce the deal after Cosette attempted to terminate.

The judgement clarifies key principles around material adverse change (MAC) clauses, forecast disclaimers, and termination rights. It confirms that proving a MAC requires a high evidentiary threshold, missed forecasts alone are insufficient where disclaimers exist, and general warranties do not override specific exclusions. It also highlights the legal significance of a bidder’s conduct when seeking to exercise termination rights under a Scheme Implementation Deed.

Background

Mayne Pharma is an ASX-listed pharmaceutical company, with a significant business presence in the United States and Australia. Cosette Pharmaceuticals, Inc and Cosette Australia Bidco Pty Ltd (Cosette Sub) (collectively, the Cosette Parties), are wholly-owned subsidiaries of Cosette Pharmaceuticals Holdings, Inc., which is jointly owned and controlled by private equity firm Avista Capital Holdings LP and investment management and advisory company Hamilton Lane Advisors LLC.

On 20 February 2025, Cosette and Mayne Pharma entered into a Scheme Implementation Deed, which provided for the acquisition of all of Mayne Pharma’s ordinary shares by Cosette Sub.

The SID contained a MAC clause and defined a ‘Mayne Material Adverse Change’ (MMAC) relevantly as follows:

Any event, occurrence, change, circumstance or matter … which has, has had or is (either individually or when aggregated together with any such other events, occurrences, changes matters or circumstances) reasonably expected to have, 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, other than any event matter or circumstance:

…

(c)        Fairly Disclosed in the Due Diligence Material (or which ought reasonably to have been expected to arise from a matter, event or circumstance which has been Fairly Disclosed);…

First Court hearing

The first Court hearing in respect of the proposed scheme occurred on 15 May 2025. At that hearing:

• The Cosette Parties supported the application for approval of the scheme.
• The Court made orders under s 411 of the Corporations Act, ordering a scheme meeting of Mayne Pharma’s shareholders be convened and held on 18 June 2025 and requiring despatch of the Mayne Pharma Scheme Booklet to Mayne Pharma shareholders.
• The Court also referred to a Deed Poll entered into by the Cosette Parties on 9 May 2025, where Cosette and Cosette Sub each covenanted in favour of each scheme shareholder that it would observe and perform all obligations owed under the scheme, including providing the Scheme Consideration.
• Cosette Group also indicated that it was assessing the potential impact of a letter received by Mayne Pharma from the United States Food and Drug Administration (FDA) on 28 April 2025, and how this might affect Mayne Pharma’s business and operations and reserved its position on the FDA Letter.

Notice of Material Adverse Change and attempt to terminate

Cosette issued its first notice of a material adverse change to Mayne Pharma (First MAC Notice) on 17 May 2025. Cosette subsequently sent a notice of termination to Mayne Pharma on 4 June 2025 (First Termination Notice), relying on the MAC Notice. Cosette claimed that an MMAC resulted from the following:

• Mayne’s Q3 FY25 Sales Performance, namely the variance between actual Q3 EBITDA and Mayne Pharma’s internal forecast for the same period (6+6 Forecast) (which combined six months of actual results with six months of projections for FY25); and
• Receipt of a letter from the FDA concerning Mayne’s oral contraceptive product, Nextstellis® and Mayne Pharma’s revision of its marketing materials in relation to that product, which was expected to have adverse financial consequences.

Also on 4 June 2025, Mayne Pharma sought declarations that the First MAC Notice was invalidly issued and that Cosette did not lawfully terminate the SID through its First Termination Notice. On 13 June 2025, Cosette sought, by way of a cross-summons, a declaration that it validly terminated the SID. Cosette also sought orders requiring Mayne Pharma to pay a “Mayne Break Fee” in accordance with the SID, as well as indemnification for losses and misleading conduct.  

The Cosette Parties declined to extend the End Date under the SID, set for 20 November 2025 (after which the scheme will lapse if not implemented). Accordingly, the Court proceedings were expedited.

Between 4 June and 20 August 2025, Cosette issued three additional termination notices, claiming that Mayne Pharma failed to:

1. comply with its continuous disclosure obligations upon receiving the letter from the FDA; and
2. collate and prepare Due Diligence Materials with reasonable care, thereby breaching representations and warranties under the SID.

 Mayne Pharma, rejected Cosette’s attempts to terminate the agreement.

The NSW Supreme Court’s findings  

The Supreme Court ultimately found in favour of Mayne Pharma, finding that the First MAC Notice was invalid and that Cosette did not validly terminate the SID. Even if the First MAC Notice was valid, the Court held that the Cosette Parties were bound by an election not to terminate the SID.

While Cosette established that aspects of Mayne Pharma’s Q3 FY25 Sales Performance constituted an adverse change, the impact of that change in Mayne Pharma’s Maintainable EBITDA fell short of the impact required to give rise to a MMAC. The Court also found that the matters arising from the FDA Letter did not meet the quantitative threshold for a MMAC contained in the SID.

The Court dismissed Cosette’s claims against Mayne Pharma regarding payment of a "Mayne Break Fee", indemnification for losses, and declarations of misleading conduct.

Material Adverse Change

Mayne Pharma’s Q3 FY25 Sales Performance

Cosette contended that a MMAC in respect of FY25 resulted from Mayne Pharma’s Q3 FY25 Sales Performance. It claimed that the reduced demand during the quarter, when compared to the company’s 6+6 Forecast, satisfied the quantitative threshold necessary to trigger the MAC clause.

In response, Mayne Pharma asserted that:

• The definition of MMAC excludes specified events, matters, and circumstances. Properly construed, that requires a comparison with the consolidated Maintainable EBITDA over a 12-month period, not with any particular forecast.
   
• Variances between actual and forecasted levels of demand, co-pay, sales and earnings could not constitute an “event, occurrence, change, circumstance or matter” under the MAC clause.
   
• The decline in underlying demand did not have the effect of diminishing Mayne Pharma’s EBITDA by more than $10.76 million (which was the quantitative threshold amount for an MMAC, as defined in the SID).
   
• Forecasts disclosed during due diligence were “fairly disclosed”.

Justice Black agreed with Mayne Pharma’s position, finding that a forecast variance “is not itself an adverse change, but rather evidence of such a change”. Consequently, Mayne Pharma’s forecast does not, in itself, diminish Mayne Pharma’s EBITDA for the purposes of the MMAC definition but indicates an estimate of the impact of other matters on Mayne Pharma’s actual Maintainable EBITDA. His Honour considered that there was a “fundamental conceptual difficulty” with a claim based on changes in Mayne Pharma’s forecasts, specifically that the:

material adverse change in EBITDA contemplated by the SID is a change in MPG’s actual position, between two points in time in a 12 month period, not a change between a forecast and an actual position…an attempt to establish an MMAC by comparing forecast results with actual results would defeat the disclaimer in respect of the forecast, in a manner that is not available on the proper construction of the SID or in such provisions generally...

The Court further noted that were this not the case, then a company would be unable to provide its most accurate estimate to its directors or a sophisticated potential acquirer.

FDA Letter

Cosette further contended that the FDA letter received by Mayne Pharma regarding changes to the promotional strategy and materials of Nextstellis® would result in financial and commercial losses over a 12-month period (thus exceeding the quantitative MAC threshold). This claim was rejected by Mayne Pharma.

The Court accepted that the FDA letter and Mayne Pharma’s response constituted an “event, occurrence, change, circumstance or matter” within the definition of a MMAC in the SID. However, the Court found no sufficient foundation in Cosette’s submissions and calculations to support claims of adverse effects on Mayne Pharma’s Maintainable EBITDA.

Justice Black found that:

‘the evidence does not establish that the receipt of the FDA Letter will have a real, still less a material, adverse impact on the promotion of Nextstellis or its sales or on [Mayne Pharma’s] business or earnings and I could not conclude that a reasonable person would expect to have a material effect on the price or value of the entity's securities on that basis.

Cosette’s claim for breach of Mayne Representation and Warranty

Cosette also relied on an alleged breach of a representation and warranty given by Mayne Pharma under the SID. The warranty claim was that the “Mayne Representation and Warranty” about ‘Due Diligence Materials’ was not true and correct and that breach was “material in the context of the Transaction as a whole”, giving Cosette a right to terminate the SID. Despite disclaimers in the SID about forward looking statements (including forecast accuracy), Cosette issued a termination notice.

The Court considered Cosette's argument that Mayne Pharma breached the SID by failing to “collate and prepare” the due diligence materials (including the ‘FY25 6+6 Forecast’) with reasonable care. The construction of the SID, on which the claim depended, was rejected by Justice Black. His Honour made several findings including that:

• The representation and warranty clause applies to the body of due diligence material collectively (rather than to each document contained in it read in isolation). As such, the FY25 6+6 Forecast cannot be attacked in isolation.
• Even if the representation and warranty applied to specific documents, there was no evidence they were prepared without reasonable care.
• The forecasts were not misleading and had a reasonable basis, particularly where the decline in January 2025 EBITDA was fairly disclosed in the Due Diligence Materials.
• Absent an external obligation to undertake continuous forecasting, it was not a breach of reasonable care for Mayne Pharma to refrain from updating a point-in-time forecast. His Honour reasoned that it is “in the nature of a forecast prepared at a point in time that subsequent actual events will likely depart from it”.
• The 6+6 Forecast, which was subject to uncertainties, did not represent that Mayne Pharma “expected” the EBITDA for FY25 “would” be $69.8 million.

Mayne Pharma’s Election Defence

In response to Cosette’s claims that they properly terminated the SID, Mayne Pharma also pleaded a defence related to the doctrine of election, arguing that Cosette’s conduct before and during the first Court hearing amounted to affirmation of the SID, including:

• On 1 April 2024 (following the alleged MAC), Mayne and Cosette negotiated and signed amendments the SID, confirming it remained in “full force and effect”.
• On 9 May 2025, the Cosette Parties executed a Deed Poll in favour of Scheme Shareholders, under which Cosette agreed to fulfil all obligations under the Scheme, including payment of the Scheme Consideration.
• During the first Court hearing, the Cosette Parties took steps to support the scheme, including putting on an affidavit verifying the “Cosette Information” in the Scheme Booklet.

The Court was ultimately satisfied that the Cosette Parties’ position taken at the first Court hearing (other than in respect of the FDA Letter, where they reserved their position), together with their knowledge of the MAC, amounted to an election to continue the arrangements contemplated by the SID, rather than terminate them.

Potential impacts and key takeaways

The judgement offers several key insights:

• Threshold for MAC: The threshold for proving a MAC involves a high standard. A bidder cannot rely solely on missed financial forecasts to establish a MAC, particularly where forecasts are accompanied by disclaimers. A forecast variance is not itself a MAC, but is rather evidence of an adverse change and it is necessary to show a change in the actual position as distinct from a change between a forecast and an actual position.
• Warranties: Warranties concerning "collation and preparation" do not equate to guarantees of forecast accuracy, especially when clear disclaimers are present. Without a duty to provide continuous updates, failing to revise point-in-time forecasts does not constitute a breach of care. Additionally, forecasts that outline risks and opportunities should not be construed to imply an "expectation."
• Termination rights: The decision also underscores the importance of a bidder’s actions when purporting to exercise their terminations rights, as Cosette’s conduct before and during the first Court hearing constituted an election to continue the SID.