NSW Court of Appeal upholds decision on material adverse change

The New South Wales Court of Appeal has dismissed Cosette Pharmaceuticals, Inc's appeal from the Supreme Court's decision in Mayne Pharma Group Limited v Cosette Pharmaceuticals, Inc & Anor [2025] NSWSC 1204, with costs.

In Cosette Pharmaceuticals, Inc v Mayne Pharma Group Limited [2026] NSWCA 215, the Court of Appeal (Free JA, with whom McHugh JA and Griffiths AJA agreed) considered, among other things, whether the primary judge erred in:

• Rejecting Cosette's misleading or deceptive conduct claim based on Mayne Pharma Group Limited's (Mayne Pharma) “6+6” EBITDA forecast.
• Finding that no Mayne Material Adverse Change (MAC) had occurred.
• Finding that Cosette had elected to affirm the SID.

The Court of Appeal unanimously rejected each of these challenges. This decision affirms that the bar to establishing a material adverse change in the context of a control transaction is high and courts will look to hold parties to their bargain absent a material change in circumstances.

Gilbert + Tobin acted for Mayne Pharma at first instance and on the appeal.

Gilbert + Tobin acts for Mayne Pharma in separate proceedings by which Mayne Pharma seeks to recover damages from Cosette and its controller, on behalf of itself and its shareholders.

The Scheme and the MAC Notice

Mayne Pharma is an ASX-listed speciality pharmaceutical company with operations in the United States and Australia. On 20 February 2025, Cosette, a US-based pharmaceutical company, entered into a scheme implementation deed with Mayne Pharma (SID), under which Cosette agreed to acquire 100% of the shares in Mayne Pharma for $7.40 cash per share.

The SID included a MAC clause with a quantitative threshold, and relevantly defined a “Mayne Material Adverse Change” as follows (subject to certain specified exclusions in the SID):

On 1 April 2025, Cosette entered into a scheme implementation amendment deed (Amending Deed) in which Cosette agreed the SID “is and continues to be in full force and effect”.

Mayne Pharma and Cosette appeared before the Court on 15 May 2025 at a First Court Hearing in respect of the Scheme, where the Court made orders for the convening of a scheme meeting and approving the dispatch of the Scheme Booklet to Mayne Pharma shareholders.

Cosette supported the Scheme at the First Court Hearing, including by providing an affidavit verifying the “Cosette Information” in the Scheme Booklet (which stated there was no reason to believe a MAC had occurred or would occur by the time of the Second Court Hearing), and supporting the submissions made by Mayne Pharma. The Court was also provided with an executed deed poll, pursuant to which Cosette covenanted in favour of Mayne Pharma’s shareholders to perform all its obligations under the Scheme, including payment of the Scheme Consideration.

Two days later, on the evening of Saturday, 17 May 2025, Cosette issued a notice to Mayne Pharma alleging the occurrence of a MAC (MAC Notice). Cosette subsequently issued its first termination notice on 4 June 2025. One of the “events” said to constitute the MAC (either separately, or in the aggregate) included Mayne Pharma’s Q3 FY2025 sales performance, referring to a shortfall between Mayne Pharma’s actual Q3 FY2025 sales and its forecasted sales performance as set out in the company’s internal 6+6 forecast (being 6 months of actual results and 6 months of forecast results for FY25) (6+6 Forecast), which was finalised in mid-February 2025.

There were three additional bases on which Cosette alleged a MAC had occurred, which were either abandoned or not the subject of the appeal. In addition, Cosette alleged Mayne Pharma had engaged in misleading or deceptive conduct and was in breach of its continuous disclosure obligations.

Commencement of the first instance proceedings

On 4 June 2025, Cosette issued Mayne Pharma with a notice purporting to terminate the SID. Later that same day, Mayne Pharma commenced proceedings in the Supreme Court of New South Wales, seeking declarations that the MAC Notice had not been validly issued and that Cosette had not validly terminated the SID. Cosette subsequently filed a cross-claim, seeking declarations that the SID had been validly terminated and, alternatively, that Mayne Pharma had engaged in misleading or deceptive conduct.

The Court proceedings were expedited due to the application of the End Date in the SID, being 20 November 2025, which Cosette declined to extend.

Between 4 June 2025 and 20 August 2025, Cosette issued three further termination notices, alleging among other things, that Mayne Pharma failed to exercise reasonable care in “preparing and collating” the due diligence materials provided in the data room, in breach of the representations and warranties under the SID. Each of these further claims were heard as part of the substantive hearing.

First instance decision

One of Cosette’s primary arguments at first instance related to an alleged “collapse” in Mayne Pharma’s underlying demand for its pharmaceutical products in Q3 FY2025. Cosette contended that a softening of actual demand in Q3 FY25, when compared to the forecasted sales performance in the 6+6 Forecast during the same period, met the relevant quantitative threshold to trigger the MAC clause.

On 15 October 2025, Black J found in Mayne Pharma's favour on all issues declaring the termination notices and associated claims invalid. His Honour held that:

• Q3 FY2025 sales performance: a forecast variance is not itself an adverse change, but rather evidence of such a change.
• Breach of the representations and warranties: the warranty in the SID that due diligence materials had been “collated and prepared with reasonable care” addressed the compilation and organisation of the due diligence materials “as a whole”, not the accuracy or reasonable basis of each individual document. This was particularly relevant given the SID’s express disclaimer in relation to forecasts. The 6+6 Forecast, which reflected inherent complexities and uncertainties and in terms identified various risks and opportunities, did not convey an “expectation” that Mayne Pharma’s EBITDA “would be” $69.8 million.

The appeal

On 15 January 2026, Cosette appealed to the Court of Appeal, and the appeal was heard over two days on 2 and 3 June 2026. Cosette did not challenge a number of the primary judge’s findings and abandoned several grounds of appeal at the hearing.

Misleading or deceptive conduct – the 6+6 Forecast

One of Cosette’s primary arguments was that the primary judge erred in finding that the 6+6 Forecast did not convey a representation that Mayne Pharma expected its FY2025 underlying EBITDA to be $69.8 million. Cosette argued that the primary judge's focus on the word “would” and on a “single figure” result was misplaced and instead advanced an alternate version of the representation relied upon at first instance, being the 6+6 Forecast represented EBITDA would be “about” or “in the order of” $69.8 million”. Cosette further contended that the representation was one with respect to a future matter, such that it would be taken to be misleading unless Mayne Pharma had reasonable grounds for making it.

In response, Mayne Pharma contended:

• The reformulated representation was not the case pleaded or run at trial and would cause prejudice if now permitted
• The qualified representation was too indeterminate to have been conveyed
• The primary judge's findings, including that the 6+6 Forecast was prepared with reasonable care (which was not the subject of challenge), resulted in Mayne Pharma having reasonable grounds for the forecast.
• In any event, causation and loss were not established, based on the primary judge’s finding that Cosette likely did not rely on the 6+6 Forecast to model Mayne Pharma’s financial performance.

The Court of Appeal rejected Cosette’s argument that the primary judge had construed the pleaded representation too narrowly, observing that:

• “The framing of Cosette’s allegation of a misleading or deceptive representation was the subject of explicit attention by the trial judge and by counsel for MPG from the outset of the trial.” Cosette did not raise an alternate formulation or seek to amend their pleadings.
• Reformulating the representation as Mayne Pharma’s “best expectation” that EBITDA would be “in the order of” $69.8 million involved “a material and prejudicial change”, not least because Cosette’s witnesses would have been cross-examined differently on reliance had that case been run.
• Having correctly identified the representation alleged, the primary judge did not err in finding it was not made, and it was unnecessary to consider whether Mayne Pharma had reasonable grounds, or any issues of causation and loss.

The MAC notice

Cosette contended that the primary judge erred in assessing whether a MAC had occurred on three bases:

• The MAC clause did not require proof of what Mayne Pharma's total EBITDA would have been absent the event, but rather concerned whether the effect of the event on EBITDA was reasonably expected to exceed the threshold.
• The primary judge erred in not having regard to certain internal documents and Cosette’s expert evidence relating to the quantification of gross margin less product operating expenses for Q3 FY2025.
• The primary judge erred in finding that Mayne Pharma’s financial performance for January 2025 had been fairly disclosed, preventing Cosette from relying on that performance.

In response, Mayne Pharma defended the primary judge's reasoning, emphasising:

• The accounting experts agreed that the reduction in Maintainable EBITDA was below the quantitative threshold.
• Cosette’s attempt to depart from that position was not open to Cosette, including because Cosette did not appeal against the finding that Cosette had failed to isolate the effect of the Q3 FY2025 sales performance from other economic factors.
• By its notice of contention, a shortfall against forecast could not itself constitute an 'event, occurrence, change, circumstance or matter' within the MAC definition, and matters which only arose by March 2025 could not have the requisite effect 'over' the FY25 12-month period which began nine months earlier.

The Court of Appeal held that the primary judge did not err in quantifying the impact of the Q3 FY2025 sales performance. The Court of Appeal found that the effect of an event on Maintainable EBITDA “can only be assessed by taking account of all of the financial consequences” of that event, including any consequential reduction in OPEX. His Honour noted that Cosette’s proposed approach was unsupported by, and contrary to, the evidence of both accounting experts.

Election to affirm

The primary judge found that as at the time of the Amending Deed, the deed poll and the first court hearing, Cosette knew the material background to each of the “events” said to constitute the MAC, including the Q3 FY2025 sales performance. As a result, had affirmed the SID and had lost any right to terminate by reason of Cosette’s “unequivocal conduct”.

Cosette argued that it had not elected to affirm the SID, on two bases:

• As at the date of the amending deed, Cosette did not yet have the knowledge necessary to make an election.
• Participating in the First Court Hearing and verifying the Scheme Booklet was conduct required by the SID and was not inconsistent with exercising its rights under the MAC clause.

Mayne Pharma submitted that:

• At the time of the amending deed and the First Court Hearing, Cosette had full knowledge of the matters it relied on as being events leading to a MAC.
• Cosette’s conduct was unequivocally inconsistent with the right to issue a MAC notice and terminate.
• Cosette’s election was a strong discretionary reason to refuse relief on the misleading and deceptive conduct claim, even if the claim was otherwise made out.

Although it was not strictly necessary to resolve, the Court of Appeal upheld the primary judge’s finding that Cosette elected to affirm the SID by its conduct at and in relation to the First Court Hearing. The Court of Appeal found that as at the First Court Hearing:

• Cosette had knowledge of the material facts.
• It was within Cosette’s own power to issue the MAC notice and enliven the termination process, so this was not an external “contingency”.
• Cosette’s statements in the Scheme Booklet went beyond mere performance of its obligations under the SID and were “fundamentally inconsistent” with reserving a right to rely on a MAC, in stark contrast to its express reservation of rights in relation to the FDA letter.
• It was not necessary to decide whether Cosette also affirmed the SID by entering into the amending deed.

Key takeaways

• Pleadings: a party will be held to the representation(s)  pleaded and run at trial and will not be permitted to advance a broader reformulation on appeal.
• MAC quantification: a quantified MAC clause measures the effect of an event on the relevant earnings metric as a whole. All financial consequences of the event, including consequential cost savings, must be brought to account, regardless of whether they result from discretionary business decisions.
• Election in schemes: a bidder that supports a scheme at the First Court Hearing with knowledge of the relevant facts, and without reserving its rights, risks losing any right to terminate on the basis of those facts.

Gilbert + Tobin acted for Mayne Pharma Group Limited on this transaction and in the court proceedings, both at first instance and on appeal.