Material adverse change clauses – When buyer’s remorse is not enough: What you need to know after the Mayne Pharma court decision

Overview

In our previous article, we gave an overview of the key issues to consider in the negotiation, interpretation and enforceability of “material adverse change” (MAC) clauses in M&A deals.

In the current economic environment – with significant volatility and downside risks due to a tightening of liquidity, lower business and consumer sentiment and geopolitical fragmentation and uncertainty – buyers are paying close attention to MAC clauses in deal negotiations and are also considering invoking a MAC clause in their existing deals when the target experiences an adverse event, such as a downturn in revenue, or downward changes in the target’s profit forecasts or share price.

The scope of a MAC clause ultimately depends on what the parties negotiate in their underlying transaction documents.

A MAC clause may include either (or a combination of) a qualitative threshold – permitting termination if there is an event which leads to a defined deterioration in the target’s business (without linking this to any specific numerical thresholds) and/or a quantitative threshold – in which case particular financial thresholds must be met before a MAC can be made out.

In either case, the drafting of the clause is critical. Even quantitative MAC clauses may still leave room for ambiguity, and it is often difficult to determine whether particular events can be sufficiently linked to the specific threshold agreed by the parties – that is, showing the required “cause and effect”. There may also be various carve-outs and qualifications that raise additional complications.

Adding to the uncertainty is that MAC clauses have rarely gone before the courts – with the parties usually negotiating a termination or modified sale terms when a dispute arises, as occurred in the EG FuelCo/Oliver’s Real Food bid and the Scottish Pacific/CML Group bid. In each case, a MAC argument had been raised by the buyer on the basis of a deterioration in the target’s revenue and net indebtedness conditions due to COVID-19.

However, in a long-awaited decision, the New South Wales Supreme Court delivered its judgment in the Mayne Pharma matter on 15 October 2025.^[1]

The decision affirms the previous views expressed by the Takeovers Panel, and overseas courts, that MAC clauses should be strictly construed, and that “buyer’s remorse” alone is never going to cut it.

The decision has important implications for M&A deal certainty and risk allocation. In this article, we consider the key outcomes and takeaways.

What did the Mayne Pharma dispute involve?

US-based Cosette Pharmaceuticals Inc (Cosette) had proposed to acquire all of the shares in ASX-listed Mayne Pharma Group Limited (Mayne Pharma) at AU $7.40 per share, and the parties entered into a Scheme Implementation Deed (SID) to effect the transaction.

On 17 May 2025, Cosette issued a notice to Mayne Pharma, alleging there had been a MAC under the SID on the basis of (among other matters):

• a deterioration in Mayne Pharma’s trade – with underperformance in a third quarter earnings update, compared to the historical trends and previous forecasts; and
• potential regulatory issues concerning Mayne Pharma’s promotion of its Nextstellis oral contraceptive pull, which had been raised in a letter to Mayne Pharma issued by the US Food & Drugs Administration (FDA).

In the SID, the relevant MAC clause used a quantitative threshold. A MAC was deemed to occur if there were circumstances which could be “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 $10.76 million”.

“Maintainable EBITDA” was defined in a complex manner – with various exclusions for restructuring costs, deferred liabilities and earn-outs, derivative adjustments, hedge and swap arrangements, and revenue, profit, costs and losses from non-operating activities.

The use of “Maintainable EBITDA” rather than reported or forecast EBITDA is significant. This metric focuses on sustainable, normalised earnings rather than point-in-time results. To prove a MAC based on a Maintainable EBITDA threshold, a buyer must demonstrate:

• the baseline Maintainable EBITDA (as at signing or another defined reference point)
• the specific revenue or cost impact attributable to the alleged MAC event (not general business performance)
• why that impact is sustainable and ongoing (not temporary or one-off)
• proper application of the defined exclusions and adjustments.

For example, one-off costs (such as restructuring expenses or regulatory compliance costs) would typically be excluded from Maintainable EBITDA calculations, whereas ongoing revenue loss from a sustained market share decline would be included (if it can be proven to result from a specific MAC event rather than general market conditions).

There were also specific carve-outs, including for matters fairly disclosed in due diligence material, general economic conditions and regulatory changes.

Cosette sought to terminate the SID on the basis of a defined MAC having occurred. It also alleged breaches of warranty as to the completeness of Mayne Pharma’s due diligence materials, and misleading and deceptive conduct flowing from those breaches.

What did the Court decide?

MAC argument

The Court rejected Cosette’s MAC argument.

Cosette had faced a difficult task. In arguing there had been a MAC, it was relying on a cumulative series of events, and projecting as to the “likely” impact of those events across a future time period in circumstances where any anticipated downturn could equally be offset by a change in market conditions.

In reaching its decision, the Court emphasised that whether there is a MAC depends on an assessment of actual events and their impact, not on missed forecasts or revised projections. While a downgraded forecast may be evidence of underlying events or facts impacting the target, it is not itself a MAC.

Further, just as fluctuating market conditions may have caused the downgrade in the first place, a court will be equally mindful that those very same conditions may continue to exist in future, such that any alleged impact on the target may not be sufficiently certain to invoke a MAC clause.

For a buyer to succeed in a MAC claim, it will need to provide expert forensic evidence which specifically identifies the underlying events said to give rise to any downgrade in revenue. It will then need to link those identified events to a quantified impact on the target. Only then will the court be in a position to assess whether there has in fact been a MAC.

According to the Court in the Mayne Pharma decision, it will never be enough for a buyer to speculate on what “might” go wrong, when there may be a counterfactual which improves the target’s performance.

Mayne Pharma was also assisted by the carve-outs to the MAC. Specifically:

• Due to the exclusion of general economic events being capable of supporting a MAC, it was not sufficient for Cosette to point to general market volatility and global economic headwinds in assessing the likelihood of the deterioration of Mayne Pharma’s EBITDA.
• The downgraded third quarter EBITDA forecast had actually been disclosed to Cosette already in the due diligence materials it received before the execution of the SID. They therefore could not be relied on in support of Cosette’s case.

In relation to the FDA regulatory issues, the Court accepted that the letter issued by the FDA was a relevant event or circumstance that needed to be taken into account. However, on the facts, Cosette was not able to demonstrate there had been a MAC as a consequence. This was because:

• Mere receipt of a letter from a regulator – in circumstances where the regulator’s allegations are not accepted by the target, and the buyer has no evidence as to whether the allegations are true or not – simply invites speculation. It may also not even be material from a continuous disclosure perspective.
• The FDA’s allegations may have (and may still) end up being unsubstantiated, or been capable of resolution without any significant impact on Mayne Pharma’s business or financial condition.
• Cosette had also not led evidence showing any direct quantifiable financial impact on Mayne Pharma arising from the FDA’s allegations.

The critical role of expert evidence

The Mayne Pharma decision underscores that buyers pursuing MAC claims must engage appropriate experts early and provide rigorous forensic evidence. This requires:

• forensic accountants to calculate the specific impact on Maintainable EBITDA (or other defined financial metrics), applying proper normalisation adjustments to distinguish one-off events from sustainable earnings effects
• industry specialists to establish causation – demonstrating that the alleged MAC event, rather than general market conditions or business-as-usual variations, caused the financial deterioration
• clear methodology that isolates the impact of specific events from factors already disclosed in due diligence or excluded by carve-outs.

Cosette’s failure to provide evidence of direct quantifiable financial impact from the FDA letter was fatal to its claim. Buyers should not issue MAC notices without first obtaining expert analysis confirming that the evidentiary threshold can be met. Conversely, targets should be prepared to engage their own experts to rebut buyer claims and demonstrate that alleged impacts fall within disclosed risk parameters or excluded categories.

Other matters

The Court rejected Cosette’s breach of warranty and misleading and deceptive conduct claims. Again, the disclaimers in the SID were beneficial to Mayne Pharma. There was an express disclaimer that no warranty was provided as to the accuracy or achievability of future forecasts, and the Court noted that Cosette, as a highly sophisticated investor, ought not to have placed the reliance it did on the expectation of a “single figure” in Mayne Pharma’s original forecasts.

In its defence, Mayne Pharma had also alleged that Cosette, by its conduct prior to the issue of its MAC notice to Mayne Pharma on 17 May 2025, had affirmed the SID and lost any right to terminate, by:

• agreeing that the SID “is and continues to be in full force and effect” in an amended SID dated 1 April 2025
• covenanting to Mayne Pharma’s shareholders (by way of executed deed polls sent to shareholders on 9 May 2025) that it would perform all of its obligations under the contemplated scheme, including paying the share price to each shareholder
• fully participating in the first court meeting for the contemplated scheme on 15 May 2025, and verifying in the Scheme Booklet filed with the court that it had no reason to believe there had been a MAC in Mayne Pharma’s condition (nor that any MAC would occur before the second court hearing).

This argument was accepted by the Court. Cosette was held to have knowledge of each of the matters it relied on in support of there being a MAC ( such as Mayne Pharma’s downgraded third quarter performance and the receipt of the FDA letter) before each of those events – yet it still purported to affirm its intention to proceed with the deal.

The scheme timeline trap and affirmation risk

The affirmation finding reveals a critical structural tension between scheme implementation requirements and preserving MAC termination rights. Schemes require bidder cooperation—executing amendment deeds, providing deed polls to shareholders, and appearing at court hearings to seek orders convening scheme meetings. Each of these acts can constitute affirmation of the contract.

This creates a narrow window for valid termination:

• Weeks 1-2 post-signing: Minimal affirmative conduct; termination rights likely preserved, but limited information may be available to assess whether a MAC has occurred.
• Weeks 3-4: Amendment deeds and preliminary court steps may commence; each act must be carefully assessed for affirmation risk.
• Post-first court hearing: Substantial affirmative conduct has occurred; termination likely constitutes repudiation rather than valid exercise of contractual rights.

By the time Cosette issued its MAC notice on 17 May 2025, it had already executed an amended SID on 1 April, provided deed polls on 9 May, and participated in the first court hearing on 15 May. The doctrine of affirmation by election meant Cosette could not subsequently elect to terminate, even if a valid MAC had existed.

Practical implications for buyers: If you believe a MAC has occurred, act decisively and early. Continuing to cooperate with scheme implementation whilst harbouring termination intentions will likely result in loss of termination rights, regardless of whether a valid MAC exists. There is no middle ground-buyers face a “use it or lose it” dilemma that requires making termination decisions before full information may be available.

Practical implications for targets: Monitor bidder conduct closely. Each cooperative act strengthens your position that the bidder has affirmed the contract. Accelerated scheme timetables reduce the window for bidder termination and enhance deal certainty.

Remedies: the Court ordered specific performance

Having found that no MAC had occurred and that Cosette had affirmed the SID, the Court ordered specific performance of the scheme. This remedy has significant implications:

• Deal certainty: Courts will enforce scheme transactions where buyers attempt to walk away without valid grounds, providing targets with confidence that signed deals will complete.
• Reputational consequences: Buyers who unsuccessfully invoke MAC clauses face not only specific performance orders but also potential reputational damage in the M&A market, which may affect their ability to negotiate future transactions on favourable terms.
• Cost exposure: Unsuccessful MAC claims expose buyers to substantial legal costs (potentially on an indemnity basis) and potential damages claims for delay or breach.
• Limited alternatives: Once specific performance is ordered, buyers have no practical option but to complete the transaction on the agreed terms, even if market conditions or the target’s performance have deteriorated since signing.

The availability of specific performance as a remedy reinforces that MAC clauses should not be viewed as discretionary exit rights or “buyer’s remorse” provisions, but as narrowly-defined contractual provisions requiring strict proof of specific, unforeseen events causing quantifiable harm exceeding defined thresholds.

Key takeaways

The Court’s decision in the Mayne Pharma matter confirms that there is a high evidentiary threshold in making out a MAC. The key lessons – for both buyers and targets – are:

1. MAC clauses remain poor exit tools.
2. Buyers will be held to their bargains – when “bidder’s enthusiasm” turns into “buyer’s remorse”, a MAC argument will not be easy to establish.
3. In assessing whether there has been a MAC, a court will focus on actual events and their impact, not speculation or general market risks.
4. Downgraded forecasts will never be enough to, on their own, give rise to a MAC.
5. Rather, the buyer must point to the underlying causes of any downgrade, and quantify the specific financial impact on the target as a result of the identified events.
6. Carve-outs are critical and will be strictly enforced. They can be the “make or break” in a MAC dispute, and both targets and buyers need to pay close attention to the scope of any carve-outs in negotiating their deal.
7. Where there is a carve-out for information fairly disclosed in due diligence (as is typically the case), it is crucial for the buyer to carefully review every document provided to it in the data room. Failure to identify relevant adverse information will prevent reliance on it in a later MAC case.
8. The buyer cannot “have its cake and eat it too”. If the buyer wishes to rely on a MAC having occurred, it must make an affirmative decision early on, and ensure it has evidence to support its claim. Sitting on the fence, and seeking to have it both ways, could risk affirming the deal and waiving any MAC-linked termination rights.
9. Timing is critical in scheme transactions. Buyers must make termination decisions early, before engaging in conduct that affirms the contract. Participating in court hearings, executing amendment deeds, or providing deed polls to shareholders will likely constitute affirmation and destroy termination rights, even if a valid MAC exists. The scheme structure creates a compressed timeline that requires decisive action within a narrow window (often before complete information is available).

It is also worth keeping in mind that the MAC clause in the Mayne Pharma matter had a quantitative threshold. If the parties have agreed to a qualitative threshold, there may be more room for the buyer to make out an argument that there has been a relevant MAC, without the burden of being tied to specific financial thresholds.

However, this will be entirely dependent on the drafting of the clause, and the level of discretion left to the buyer in determining if there has been a relevant deterioration in the target’s condition to invoke the clause. Even in that case, the Court’s decision in Mayne Pharma indicates the buyer would still need clear evidence of the specific event said to give rise to the MAC, and to link it to a direct adverse impact on the target.

Please get in touch with Brett, Peter or Benny if you would like to discuss the impact of the decision in further detail, or to speak about your own risk exposure in an existing or contemplated M&A deal.

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[1] In the Matter of Mayne Pharma Group Limited [2025] NSWSC 1204.