In short
In Cosette v Mayne Pharma a buyer could not rely on a material adverse change clause although the target's forecast EBITDA fell by about twice the threshold. The clause measured the net effect of identified events on actual earnings, and the buyer had in any event affirmed the deal in court while knowing the facts.
- Operating cost savings that follow an event reduce its measured effect.
- A decline fairly disclosed in the data room was excluded, read or not.
- A notice and consultation step does not stop the buyer losing the right by affirming.
What happened
A US pharmaceutical group agreed to buy an ASX-listed Australian company, then tried to walk away on the ground that a material adverse change had occurred, and lost. Under a scheme implementation deed dated 20 February 2025, Cosette Pharmaceuticals agreed to acquire all the shares in Mayne Pharma Group at $7.40 each by scheme of arrangement. One condition was that no "Mayne Material Adverse Change" (MAC) occurred before the second court hearing.
After signing, Mayne Pharma's sales of women's health and dermatology products fell well below forecast. Cosette served a MAC notice on 17 May 2025 and a termination notice on 4 June 2025. Mayne Pharma sued the same day for declarations that neither notice was valid. Cosette cross-claimed for a declaration that it had validly terminated, and for a break fee.
HeldFree JA, with McHugh JA and Griffiths AJA agreeing. No MAC occurred, because the effect of the sales decline had to be measured net of every financial consequence, including the operating cost savings that followed, and on that measure it did not reach the threshold. In any event Cosette had lost its right to terminate by affirming the deed at the first court hearing. Appeal dismissed with costs.
The trial in the Supreme Court took eleven days and ended on 10 October 2025. Black J gave a detailed judgment five days later, because Cosette had declined to extend the deed's end date of 20 November 2025. The Court of Appeal dismissed Cosette's appeal. As the Court records, "the SID was terminated following judgment", so the acquisition did not proceed.
Law current at 15 October 2026. This article describes one NSW Court of Appeal decision on the wording of one scheme implementation deed. Whether Cosette will seek to take the matter to the High Court is not known at that date.
The clause
The clause did not ask whether the business had got worse. It asked whether identified events had reduced a defined earnings figure, over a 12-month period, by at least A$10.76 million. The definition read, in its operative part:
Any event, occurrence, change, circumstance or matter, whether occurring before, on or after the date of this deed, 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 …
[2026] NSWCA 215 [130].
Each element mattered. "EBITDA" meant underlying earnings calculated using the methodology of Mayne Pharma's 2024 annual accounts. "Maintainable EBITDA" converted US dollar items at a fixed rate of 0.6558. The definition then excluded a list of matters, including anything fairly disclosed in the due diligence material and anything arising from general economic or political conditions.
| Element | What the deed said |
|---|---|
| Condition | No MAC between signing and 8.00am on the day of the second court hearing |
| Measure | Consolidated Maintainable EBITDA over a 12-month period, on the 2024 accounting methodology, at a fixed exchange rate |
| Threshold | A diminution of at least A$10.76 million, which has occurred or is reasonably expected |
| Main exclusions | Matters fairly disclosed in due diligence; general economic or political conditions; changes in law; the announcement of the scheme itself |
| Process | Prompt written notice, then good faith consultation; if no agreement within ten business days, the party with the benefit of the condition may terminate |
A scheme of arrangement needs two court hearings under section 411 of the Corporations Act 2001 (Cth). At the first, the court orders a meeting of shareholders and approves the explanatory booklet sent to them. At the second, after the shareholders have voted, the court decides whether to approve the scheme. The MAC condition ran until the morning of the second hearing.
A missed forecast is evidence, not the event
A change in a forecast was not itself a MAC under this deed, but a missed forecast could be evidence that a qualifying event had occurred. Cosette's starting point was striking. In February 2025 Mayne Pharma forecast FY25 underlying EBITDA of $69.8 million. By April its internal forecast was $45 million, and its guidance to the market was $47 million to $51 million: a fall of $18.8 million to $22.8 million, against a threshold of $10.76 million.
The trial judge held that a change in forecast is the reflection of other events, not an event in its own right, and the Court of Appeal agreed that this was correct for the purposes of this deed. Black J preferred the approach of the Delaware Court of Chancery in Akorn v Fresenius, that "a failure to meet a financial projection is not itself an adverse change, but rather evidence of such a change". The clause measured a change in actual earnings, not the gap between a forecast and a result.
So Cosette had to identify the events behind the miss. It relied on weak underlying demand, co-payment increases on dermatology products, and poor actual sales in the March quarter. The trial judge accepted that weak demand and poor sales were established, and found they were most likely caused by changes in Mayne Pharma's sales team, not by general economic conditions. The fight was over how much those events had cost.
The target's cost savings count
The effect of an event on EBITDA includes everything that follows from it, so operating cost savings made in response reduce the diminution the buyer can count. This was the main issue on appeal. Cosette accepted that if Mayne Pharma's reduced operating expenditure was taken into account, its records did not show a fall of $10.76 million. It argued that only lost revenue, less the direct cost of goods sold, should be counted.
The Court of Appeal rejected that. Operating expenditure is part of the orthodox calculation of EBITDA, and "Nothing in the contractual language suggests that OPEX is to be treated as somehow sitting outside the process of calculating impacts on Maintainable EBITDA". The Court concluded:
The ultimate effect (either as has occurred or as reasonably expected) on Maintainable EBITDA of the relevant event, occurrence, change, circumstance or matter can only be assessed by taking account of all of the financial consequences of that event, occurrence, change circumstance or matter.
[2026] NSWCA 215 [154].
Cosette argued that cost cuts were discretionary management decisions, not consequences of the sales decline. The Court answered that "the performance of any business is the product of myriad discretionary decisions". Cosette's own example was a cut to short-term incentive payments for staff, recorded in Mayne Pharma's April forecast after sales fell. Cosette said that saving was a separate business choice. The Court called that "a distinction without a difference": the cut was one of the effects of the sales decline, and excluding it would be arbitrary.
| Cosette's measure | The Court's measure | |
|---|---|---|
| Lost revenue on the affected products | Counted | Counted |
| Direct cost of goods sold | Deducted | Deducted |
| Operating cost savings that followed, including lower bonuses | Ignored | Deducted |
| Result against the A$10.76 million threshold | Above, on Cosette's case | Below, as Cosette accepted |
This is a reading of these words, not a rule about every MAC clause. A buyer who wants revenue measured on its own, or wants management's cost responses left out, has to say so in the definition.
The buyer has to prove the number
Cosette lost the quantification on its evidence: it had to show what earnings would have been without the identified events, and it did not. The trial judge said the comparison between forecast and actual results did not isolate the effect of the identified matters, because the actual result reflected every adverse change in the business. That failure "fatally undermines that approach". He noted that expert evidence adjusting the actual results for the identified matters could have done it.
The expert evidence that was led did not help Cosette. Its own accounting expert's first calculation crossed the threshold, but used the wrong exchange rate and included a one-off correction to a co-payment error dating back to the product's launch. Once the deed's exchange rate was applied and that correction removed, both experts agreed the threshold was not met. Mayne Pharma's expert put the figure at A$8.618 million. Cosette's argument on appeal, that operating cost savings should be ignored, contradicted the approach of both experts, its own included.
Two questions about the measurement were argued and not decided. One is which 12-month period counts. Cosette chose the financial year in which the decline occurred; Mayne Pharma said the period must start at or after the event. The trial judge assumed Cosette was right without deciding it, and the Court of Appeal did not reach the point. The other is how likely an effect must be to be "reasonably expected". Black J preferred an English decision asking whether a reasonable person would consider it more likely than not, and the parties accepted that, in the trial judge's words, "a mere risk of an MMAC is not enough" (MMAC being the judgment's short form for the deed's defined term). The Court of Appeal called the argument about the standard "a distraction" and did not resolve it.
What the data room disclosed was excluded
A decline disclosed in the due diligence material was outside the clause, whether or not the buyer's decision makers had read it. On 19 February 2025, the day before signing, Mayne Pharma uploaded a monthly cash flow spreadsheet to the virtual data room. One line showed EBITDA for January 2025 as a loss of $5.1 million, about $0.8 million worse than forecast.
Cosette's advisers reviewed the document. Its chief executive, its chief financial officer and a director of its parent company did not personally know of it when the board decided to sign. The chief executive and the director gave evidence that they would not have supported signing had they known of the early 2025 sales shortfall. The trial judge found their evidence rested on the false premise that the information had not been provided.
Black J held that the January decline had been fairly disclosed and could not be used to establish a MAC. The deed turned "upon the disclosure of this matter in due diligence and not upon whether Cosette had regard to the information". Cosette argued on appeal that only the decline, not its cause, had been disclosed. Its counsel accepted that the point was of limited significance, and the Court of Appeal did not decide it. The trial judge's ruling stands.
How the buyer lost the right to terminate
A buyer who knows the facts that would allow it to terminate, and then acts in a way that only makes sense if the deal continues, loses the right to terminate on those facts. This is the doctrine of election. Under the High Court's settled formulation, a party with knowledge of the material facts who chooses between inconsistent rights is held to that choice, even if it did not appreciate that it had a right to terminate.
Cosette admitted at trial that by 22 April 2025 it knew of the revised forecast and the reduced market guidance. On appeal it conceded that it knew the material facts by the first court hearing on 15 May. At that hearing it did three things. Its counsel told the court it supported orders convening the shareholders' meeting. Its executive's affidavit was read without update or qualification. And the scheme booklet carried its statements that it knew of no reason its debt financing conditions would not be met, one of which was that no MAC had occurred, and that no undisclosed information about Cosette or its intentions for Mayne Pharma, material to a shareholder deciding how to vote, was within the knowledge of any of its directors. Two days later it served the MAC notice.
The trial judge found that this conduct was an unequivocal affirmation of the deed. In his words, "there would be a real inconsistency between appearing at the first Court hearing, apparently to support a scheme, and reserving an undisclosed right to terminate the SID." Cosette did not challenge that characterisation on appeal. He also found an earlier election, on 1 April 2025, when Cosette signed a deed of amendment confirming that the deed continued in full force. The Court of Appeal did not need to decide that point.
A notice and consultation step does not preserve the right
A termination right that can only be exercised after the buyer serves a notice and consults is still a right the buyer can lose by affirming the deal. The only argument Cosette pressed at the hearing of the appeal on this point was that on 15 May it had no right to terminate at all. It had a right to serve a MAC notice, which would start a ten business day consultation period, after which a termination right might arise. With nothing yet to elect between, it said, there could be no election.
The Court of Appeal rejected the argument. Earlier authority distinguishes a right that depends on a future event which may or may not happen. Until that event occurs, the party has only one course open: to proceed. Cosette's position was different, because the first step was in its own hands:
The fact that the right to bring the contract to an end on the basis of the alleged Mayne MAC was conditional on further steps being taken by Cosette itself, in the sense that Cosette was required under the SID to serve an anterior notice and follow a process of negotiation before the right to terminate is available, does not avoid the relevant inconsistency.
[2026] NSWCA 215 [160].
As the Court put it, "It was already within the power of Cosette to take a different course by issuing the MAC notice and enlivening the contractual termination process." Cosette had also argued in writing that it had merely performed its obligations under the deed to appear and to verify information. It was not clear whether that argument was still pressed. The Court said it would reject it if it was, because the booklet statements went beyond anything those obligations required.
The Court described its decision on election as "not strictly necessary", because Cosette had already lost on whether a MAC occurred. It decided the point anyway, in full and unanimously, as a second and independent reason for dismissing the appeal.
The one reservation the buyer did make
Cosette expressly reserved its position on one matter at the first court hearing, and both courts used that reservation to show that the rest of its conduct was unqualified. The matter was a letter from the US Food and Drug Administration. Cosette disclosed it at the hearing and reserved its rights, but made no reservation about the sales figures that later appeared in the MAC notice. The Court of Appeal put it this way:
A stark contrast can be drawn with Cosette’s approach to the FDA letter. Cosette expressly reserved its rights in that regard, thus qualifying its conduct in support of the scheme.
[2026] NSWCA 215 [165].
Neither court decided that a reservation would have preserved the termination right; the FDA ground failed at trial and was not pursued on appeal. The trial judge's reasoning shows why a buyer cannot keep a reservation to itself. An undisclosed reservation would have left its information in the booklet incomplete, and a disclosed one might have cost it leave to appear. The scheme process forces the choice before the first hearing.
The deed's no-waiver clauses did not help Cosette either. The trial judge held they dealt with waiver, not with the separate doctrine of election, and did not reach positive acts of affirmation. Cosette did not pursue that point on appeal.
The forecast claim failed on its own wording
Cosette's misleading conduct claim failed because the representation it pleaded was not made, and it could not reframe the representation on appeal. It alleged that Mayne Pharma, by its February forecast, represented that it "expected" FY25 underlying EBITDA "would be" $69.8 million. The forecast stated that "overall risks exceed opportunities at present" and quantified risks and opportunities around the figure.
The trial judge found that the representation was not made. The proposition that a sophisticated buyer would read a forecast of a complex business, which disclosed risks and opportunities, as an expectation of a single figure "need only be stated to be rejected". On appeal Cosette recast its case as a representation that Mayne Pharma's best expectation was EBITDA "in the order of" $69.8 million. The Court of Appeal refused: the trial judge had raised the wording with Cosette's counsel during the trial, Cosette took the point on notice, and it neither explained its case nor applied to amend. "These are not arid points of pleading." Whether a reformulated claim would have succeeded was not decided.
What the decision does not decide
The decision reads one deed's words on one set of facts, and several questions a buyer will care about were left open. The Court of Appeal cited no earlier Australian appellate decision on a MAC clause. The only Australian case on a MAC clause that either court referred to was a 2013 first instance decision on a financing agreement, whose clause the trial judge described as very different.
| Question | Position |
|---|---|
| Whether operating cost savings count in measuring the effect on EBITDA | Decided by the Court of Appeal, on this deed's words: they do |
| Whether a notice and consultation step prevents an election | Decided by the Court of Appeal: it does not, where the buyer controls the first step |
| Whether supporting the scheme at the first hearing was an affirmation | Found by the trial judge and not challenged on appeal |
| Whether signing the deed of amendment was an election | Found by the trial judge; not decided on appeal |
| Whether disclosure of a decline, without its cause, engages the exclusion | Not decided |
| Which 12-month period counts | Not decided |
| How likely an effect must be to be "reasonably expected" | Not decided |
| Whether performing a contractual obligation can itself be an election | Expressly left open |
| Whether the reformulated forecast representation was made or was misleading | Not decided |
The judgments say only that the deed was terminated after the trial judgment. They do not say what, if anything, either side recovered.
If you are buying
Decide what the MAC clause measures, and decide before the first court hearing whether you will rely on it. An Australian scheme timetable is a series of points at which the buyer's conduct can be treated as a choice. Our mergers and acquisitions page covers the transaction work itself, and our Frankfurt office works with German-speaking acquirers in German.
- Define the measure. If revenue alone, or earnings before management's cost responses, is what matters to you, the definition has to say so. "Maintainable EBITDA" on the target's own methodology counts every consequence.
- Say which 12 months. Whether the period may be a financial year that started before the event was argued and not decided.
- Define the standard. State what "reasonably expected" requires. It was argued and not decided here.
- Treat the data room as read. What your advisers saw counts against you under a fair disclosure exclusion like this one, whether or not it reached the board.
- Build the counterfactual early. Instruct an expert to isolate the effect of the specific events on actual earnings. The gap between two forecasts showed that a decline had happened; it could not measure it.
- Serve the notice or reserve expressly before the first hearing. Once you know the facts, supporting the scheme in court and verifying the booklet without qualification can cost you the right to terminate on them.
Termination rights exercised on another party's assessment raise questions of their own, discussed in our note on terminating on someone else's assessment. Where the deal is a private share sale rather than a scheme, what the buyer was told before signing is tested through the contract itself, as in the dispute discussed in our note on an intra-group liability not disclosed to the buyer.
If you are the target
Disclose fully in the data room, record why your costs moved, and hold the buyer to the scheme timetable. Mayne Pharma's defence rested on three things it could prove: the January decline was in the data room, its records showed the operating cost savings that followed the sales decline, and the buyer's conduct at the first hearing was on the record.
Forecasts given in due diligence should carry their risks and opportunities on their face, as Mayne Pharma's did. The trial judge also rejected a claim that the target had failed to take reasonable care with its forecast, observing that the contrary view would mean management "could not provide its best estimate". Where a buyer starts to signal doubt, the steps after a disputed termination notice are ordinary commercial litigation decisions, made against the deal's end date.
