The Supreme Court of New South Wales has reaffirmed the high threshold for establishing a material adverse change (MAC) in M&A transactions in Australia. In its much-anticipated decision In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204, the Supreme Court confirmed that bidders face a high evidentiary bar to establish a MAC where the relevant clause adopts a quantified ‘Maintainable EBITDA’ threshold.
Gilbert + Tobin acted for Mayne Pharma, the plaintiff and cross-defendant. The Court considered, amongst other things, whether the relevant MAC clause in a scheme implementation deed had been triggered as a result of, amongst other things, variances in actual results to forecasts and the receipt of a letter from a United States regulator regarding the promotion of Mayne Pharma’s flagship product, Nextstellis®. In declaring Cosette’s termination notices invalid and dismissing its cross-claim, the Court held the Scheme Implementation Deed (SID) had not been validly terminated and remains on foot.
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, under which Cosette agreed to acquire 100% of the shares in Mayne Pharma for cash consideration of $7.40 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):
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); …
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. At the First Court Hearing, Cosette indicated it was “considering the impact of” a letter published by the US Food and Drug Administration (FDA) in respect of promotional material for one of Mayne Pharma’s pharmaceutical products.
Two days later, on the evening of Saturday, 17 May, 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. The “events” said to constitute a MAC (either separately, or in the aggregate) related to, amongst others:
Mayne Pharma’s Q3 FY2025 sales performance – the 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; and
US FDA letter – the receipt of a letter by Mayne Pharma from the FDA in relation to claims made in marketing materials for Mayne Pharma’s flagship product (Nextstellis®, an oral contraceptive pill) and Mayne Pharma’s subsequent amendment of those marketing materials, which would in turn negatively affect sales.
There were two additional bases on which Cosette alleged a MAC had occurred, which were abandoned shortly before or during the course of the Court trial.
Commencement of the Court 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.
Between 4 June 2025 and 20 August 2025, Cosette issued three further termination notices, alleging that Mayne Pharma breached its continuous disclosure obligations following receipt of the US FDA letter and, separately, 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.
Mayne Pharma’s FY2025 6+6 Forecast
One of Cosette’s primary arguments 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.
In response, Mayne Pharma contended:
A forecast by its very nature cannot be used as a relevant measure to assess the MAC clause. Further, the accuracy of any forecasts was expressly excluded from the representations and warranties given under the SID.
Variances between actual sales performance and forecast sales performance could not constitute an “event, occurrence, change, circumstance or matter” within the meaning of the MAC clause in the SID.
Even if the forecast was a relevant measure (which was denied) the alleged “collapse” in underlying demand did not have the effect of diminishing Mayne Pharma’s EBITDA by more than $10.76 million.
In any event, the forecasts disclosed during due diligence (including the 6+6 Forecast) were expressly disclaimed as being accurate and were “fairly disclosed”, such that any “events, occurrences, changes, circumstances or matters” relating to those forecasts were excluded from the MAC clause in the SID.
The Court agreed with Mayne Pharma and held that a forecast variance “is not itself an adverse change, but rather evidence of such a change”. Further, his Honour acknowledged a “fundamental conceptual difficulty with a claim by reference to changes in [Mayne Pharma’s] forecasts”, being that (emphasis added):
… the material adverse change in EBITDA contemplated by the SID is a change in [Mayne Pharma’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 a [Mayne Material Adverse Change] 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:
… could not provide its best estimate to a company's directors or a sophisticated potential acquirer, recognising both the possibility of over-performance and under-performance, but would instead be required to provide a less useful and less informative estimate which was biased to conservatism …
US FDA letter
Cosette also argued that the effect of a regulatory letter received from the FDA’s Office of Prescription Drug Promotion was that Mayne Pharma could no longer market and promote its flagship product, Nextstellis®, as it had previously, such that there would be a significant decline in sales of the product over a 12-month period in excess of the quantitative MAC threshold.
Mayne Pharma rejected this allegation.
While the Court accepted that the FDA letter (and Mayne Pharma’s response to it) constituted an “event, occurrence, change, circumstance or matter”, it found that Cosette failed to establish that the contents of that letter (or the response) had the requisite impact on Mayne Pharma’s consolidated Maintainable EBITDA.
In assessing the significance of the FDA letter, the Court found that although the receipt of a letter from a regulator was plainly an important matter for Mayne Pharma (and a matter taken seriously by the company, which operated in a highly regulated industry), the fact of the receipt of such a letter was not necessarily “material” in the relevant sense (including from a continuous disclosure perspective). This was because Cosette had not established the matters raised in the FDA letter were in fact correct, it was possible that the issues raised by the FDA could be readily resolved, that resolution would involve only modest immediate costs (e.g. cost of replacing marketing material), and there was no evidence of an adverse impact on the promotion of the product, its sales or on Mayne Pharma’s business or earnings. Further, Cosette led no evidence as to the cause of the share price drop that occurred around the time the FDA letter was published.
Affirmation by election
In response to Cosette’s claims generally, Mayne Pharma argued that Cosette, by its conduct prior to and at the First Court Hearing, had affirmed the SID and had lost any right to terminate by reason of Cosette’s “unequivocal conduct” in:
Entering into a scheme implementation amendment deed on 1 April 2025, by which Cosette had agreed the SID “is and continues to be in full force and effect”.
Executing and serving deed polls on 9 May 2025, by which Cosette covenanted to Mayne’s shareholders to observe and perform all obligations under the Scheme, including paying the Scheme Consideration.
Participating in the lead up to the First Court Hearing on 15 May 2025, including verifying the “Cosette Information” in the Scheme Booklet which stated that there was no reason to believe that a MAC had occurred or would occur by the Second Court Hearing.
In accepting Mayne Pharma’s submissions, the Court found that the material background to each of Cosette’s alleged claims as to the drop in sales against forecast and the receipt of the FDA letter were known to Cosette prior to each of the events set out above.
As a result, the Court found that it was “plain enough” that Cosette “had knowledge of the material facts necessary to give rise to an election”, yet it proceeded with each of the above actions without explicitly reserving its right to terminate. Cosette had thereby unequivocally confirmed the continuing effect of the SID and excluded the possibility of termination.
In particular, the Court noted the important public aspects of schemes of arrangement, stating in the judgment:
I am reinforced in taking this view in the context of a scheme of arrangement, where an acquirer’s choices has significant public impacts, not only upon a target company and its shareholders, but also upon its employees and the communities in which it conducts business. Cosette’s choice, with admitted knowledge of relevant matters, to amend the SID and affirm its continued operation was necessarily inconsistent with a choice to terminate and amounted, at least, to an election not to terminate the SID by reason of the matters then known to it.
Due diligence warranty claim
The Court also considered Cosette’s claim, first raised in its second termination notice, that Mayne Pharma had failed to “collate and prepare” the due diligence material disclosed in the data room with “reasonable care” in breach of the representations and warranties under the SID. The substance of this claim was, in effect, that Mayne Pharma had failed to prepare the “6+6 Forecast” with reasonable care, and that, if it had, the 6+6 Forecast would have been “revised downwards” before Cosette entered into the SID.
Cosette relied on this purported breach to issue a termination notice to Mayne Pharma, despite clear and unambiguous standard disclaimers in the relevant provision of the SID and when accessing the virtual data room. These disclaimers expressly carved out any representation or warranty regarding the accuracy or achievability of forecasts in the due diligence materials, which included the 6+6 Forecast. Despite this, Cosette sought to circumvent the disclaimers, arguing that they did not qualify the warranty given by Mayne Pharma as to the “collation and preparation” of the due diligence material.
The Court construed the “collated and prepared with reasonable care” warranty in the SID as addressing 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 Court further accepted that 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.
In any case, the Court found that it was not a breach of reasonable care for Mayne Pharma to refrain from continuously updating a point-in-time forecast absent an external obligation to do so. That was because, the Court found, it was “in the nature of a forecast prepared at a point in time that subsequent actual events will likely depart from it”.
Key takeaways
The Court’s judgment has confirmed:
MAC threshold and proof: A quantified MAC clause demands proof of the underlying “event” and a more-likely-than-not diminution against the contractual metric, isolating the pleaded event’s impact from other factors. Forecast variances are evidentiary, not operative.
Forecast warranties and disclaimers: “Collation and preparation” warranties do not morph into accuracy warranties for forecasts, especially where the relevant SID contains a clear forward-looking disclaimer. Forecasts that disclose risks and opportunities and which are contextually caveated will rarely convey an “expectation”.
Continuous disclosure: Ex ante materiality must be shown on the information context available at the time. Price moves amidst mixed disclosures require expert causation analysis. Absent that kind of evidence, an inference of materiality is unlikely.
Affirmation: A bidder’s conduct at the First Court Hearing can amount to affirmation and a waiver of rights to terminate. Be slow to “dance” unless you mean to wed.
Gilbert + Tobin acted for Mayne Pharma Group Limited on this transaction and in the Court proceedings.