Mayne v Cosette MAC decision upheld on appeal

The NSW Court of Appeal has rejected all grounds of appeal brought by Cosette Pharmaceuticals, Inc in its attempt to establish it had a right to terminate the scheme implementation deed with Mayne Pharma Group Limited, reinforcing that the threshold for proving a MAC involves a high standard.

In brief

The NSW Court of Appeal has rejected all grounds of appeal brought by Cosette Pharmaceuticals, Inc (Cosette) in its attempt to establish it had a right to terminate the scheme implementation deed with Mayne Pharma Group Limited (Mayne).

The Court of Appeal’s decision makes clear that:

• The terms of the SID are the source of truth and Courts will interpret the drafting strictly, and accordingly parties should be very specific in MAC drafting.
• Parties should be conscious of any affirming actions after becoming aware of any facts that might give rise to a right to terminate an agreement.

Background to the dispute

Further detail regarding the background to the dispute and the findings of the NSW Supreme Court in the initial judgment on this matter are included in our previous articles on the dispute (here and here).

In early 2025, Cosette and Mayne entered into a scheme implementation deed (SID) for Cosette to acquire Mayne. The SID was subject to certain conditions precedent, including that no Mayne “Material Adverse Change” (MAC) occur.

After certain events occurred, including a trading update by Mayne, Cosette sought to terminate the SID on the basis that there had been a MAC, as well as breaches of certain representations given by Mayne in the SID, including misleading or deceptive conduct.

Mayne disputed this, contending Cosette was not entitled to terminate the SID and was required to continue to implement the scheme.

In the initial proceedings on this matter, the NSW Supreme Court rejected Cosette’s arguments, including on the basis that:

Cosette did not make out the misleading and deceptive conduct claim as Mayne did not represent that its FY25 EBITDA would be $69.8 million exactly;

1. the impact of poor sales performance (as announced as part of the trading update) on EBITDA was not large enough to constitute a MAC, as defined under the SID; and
2. even if there was a MAC, Cosette had taken subsequent actions that had the effect of affirming the SID and waiving any termination right, including entering into a SID amendment that confirmed the SID remained in full force and effect, and supporting the scheme at the first court hearing without raising any issue.

The appeal

In its appeal, Cosette maintained that it had a valid right to terminate the SID, arguing:

1. Misleading or deceptive conduct: the Court took too narrow a view of its misleading or deceptive conduct case, which was that Mayne had represented that its FY25 EBITDA would be ‘in the order of’ $69.8 million (and not exactly $69.8 million); and
2. MAC: the impact of Mayne’s poor sales performance on its EBITDA was not correctly calculated because Mayne’s reduced operating expenses should not have been included in the calculation (even if that reduction in expenses was related to the poor sales performance); and
3. Scheme progress: its attendance at the first court hearing was not inconsistent with reserving its right to terminate.

Key takeaways

The Court of Appeal rejected all of Cosette’s arguments. In doing so, the Court held that:

a. The terms of the SID are the source of truth

In confirming that the SID termination right for Material Adverse Change was not triggered, the Court of Appeal noted that:

1. Calculating Mayne’s “Maintainable EBITDA” (and “EBITDA”) for the purposes of testing whether there had been a MAC required a consideration of all of the financial consequences of the relevant matter, unless specifically excluded by the terms of the SID.
2. In particular, Cosette had argued that a reduction in expenditure should not be taken into account when calculating how a reduction in revenue had impacted EBITDA for the purposes of determining if a MAC had occurred. The Court rejected this, finding that where a reduction in expenditure was a response to, and a normal part of managing, reduction in revenue, there was no basis for excluding it on the basis that it was “discretionary”.

This is a salient reminder to parties, both in the context of MAC clauses and financial thresholds more broadly. It is critical to ensure the contractual wording, and the parties themselves, are clear on what will be included or excluded from any relevant calculation.

b. Be wary of affirming actions and waiving any termination right

Cosette had contended that its conduct at the first scheme court hearing, including providing the contractually required verification affidavit, did not amount to an election to waive any right to termination. Cosette also argued that since there were additional steps required to terminate the SID, namely to issue a MAC Notice and then comply with a consultation regime, it did not yet have a right to terminate the SID and accordingly could not have waived a right to terminate.

The Court of Appeal rejected this, finding Cosette’s arguments were inconsistent with what the Court described as conduct that “amounts to unequivocal affirmation of the ongoing operation of the SID”.

This serves as an important reminder to parties that actions inconsistent with a reservation of rights may amount to a waiver of any resulting termination right. In this case, the Court of Appeal found that where Cosette knew of facts that it considered gave rise to a MAC but took steps to support and affirm the scheme, it could not subsequently rely on those facts as a basis for termination.

c. Ensure pleadings align with the asserted breach

Finally, the Court of Appeal rejected Cosette’s arguments that the primary judge had interpreted Cosette’s pleadings on misleading or deceptive conduct too narrowly, holding Cosette to their pleadings, and noting that this had been specifically raised as part of the initial proceedings.

Given the Court of Appeal’s determination that there was no error in Black J’s determination that the specific representation had not been made, the Court of Appeal accordingly did not need to consider further whether the broader representation (as proposed by Cosette) had a reasonable basis.

Conclusion

The findings of the Court of Appeal reinforce that the threshold for proving a MAC involves a high standard. The decision emphasises the importance of parties giving careful consideration to the formulation of their MAC provisions, and relevant financial thresholds more generally, to avoid unintended consequences.

Parties also need to be careful if they become aware of facts that might give rise to a termination right, they should take stock of how to ensure they reserve those rights, rather than inadvertently waiving those rights through their actions.