NSW Court of Appeal: Cosette Pharmaceuticals Mayne Pharma MAC Cost Savings Argument Rejected

• The NSW Court of Appeal dismissed Cosette Pharmaceuticals' appeal to terminate its acquisition of Mayne Pharma.
• The court ruled that all financial consequences, including discretionary cost savings, must be considered when assessing a material adverse change (MAC) event.
• Cosette's attempt to exit the scheme implementation deed was invalid because the financial impact, after accounting for savings, did not meet the MAC threshold.
• Cosette was found to have affirmed the contract by supporting a shareholder meeting while having knowledge of facts that could lead to termination.
• A misleading or deceptive conduct claim by Cosette against Mayne Pharma was also rejected due to inconsistent pleading on appeal.

The court's decision underscores that, in the absence of explicit contractual provisions to the contrary, all financial consequences, including those arising from discretionary business decisions like cost reductions, must be factored into material adverse change assessments.

The New South Wales Court of Appeal recently affirmed a lower court's decision, rejecting an attempt by Cosette Pharmaceuticals Inc. to withdraw from a significant acquisition agreement with Mayne Pharma Group Limited. In a unanimous ruling handed down on 14 October 2026, the court in Cosette Pharmaceuticals, Inc v Mayne Pharma Group Limited [2026] NSWCA 215 dismissed Cosette's appeal and mandated that it cover Mayne Pharma's appeal costs, thereby upholding the finding that Cosette had not validly terminated the deal.

The dispute originated from a scheme implementation deed signed in February 2025, under which Cosette had agreed to acquire Mayne Pharma for $7.40 per share through a scheme of arrangement. Following a period of weak third-quarter sales, Cosette issued a notice in May 2025 alleging a material adverse change (MAC) had occurred, subsequently delivering a termination notice in June of the same year. Cosette's attempt to exit the takeover hinged primarily on two key arguments: the interpretation of the MAC clause concerning cost savings and whether its actions constituted an affirmation of the contract.

A central component of the scheme implementation deed was a material adverse change clause, which permitted termination if an event had an actual or reasonably anticipated effect of reducing Mayne Pharma's maintainable earnings before interest, tax, depreciation, and amortisation (EBITDA) by at least $10.76 million over a 12-month period. Cosette contended that a shortfall in sales triggered this clause. However, accounting experts from both parties factored in operating cost savings when assessing the sales shortfall.

Crucially, Cosette acknowledged that once these cost savings were incorporated, the financial impact fell below the stipulated MAC threshold. Cosette argued that these savings should be disregarded because they stemmed from Mayne Pharma's discretionary business decisions, such as reductions in staff incentives. The court, however, rejected this interpretation, finding no provision within the deed that differentiated between savings derived from discretionary actions and other financial consequences. The judges concurred with Mayne Pharma's assertion that "the performance of any business is the product of myriad discretionary decisions," concluding that the MAC test necessitated the inclusion of all financial consequences of an event, including these takeover termination discretionary savings. This ruling provides significant clarity on how Cosette Pharmaceuticals Mayne Pharma MAC cost savings are to be assessed in M&A contexts.

Beyond the material adverse change clause M&A interpretation, the court also upheld the finding that Cosette had, through its actions, affirmed the scheme implementation deed. On 15 May 2025, Cosette supported Mayne Pharma's application to convene a shareholder meeting for the scheme, without any qualification in its supporting affidavit. This occurred despite Cosette conceding that it was already aware of the underlying facts that would lead to its MAC notice, which was issued just two days later.

Cosette argued that at that point, it merely possessed a right to serve a notice that *could* potentially lead to termination, not an immediate termination right. However, the court determined that the decision to serve the notice rested solely with Cosette, and therefore, its act of supporting the scheme while simultaneously reserving a right to terminate the deal was inconsistent. Furthermore, Cosette's misleading deceptive conduct claim against Mayne Pharma also failed. Cosette had alleged that Mayne Pharma represented its 2025 financial year EBITDA "would be" $69.8 million. On appeal, Cosette attempted to broaden its argument by recasting this representation as "in the order of" that figure. The court held that Cosette, having adhered to its specific pleaded wording during the trial, was precluded from advancing a broader case on appeal.

This judgment from the NSW Court of Appeal carries significant implications for parties involved in M&A transactions, particularly concerning the drafting and interpretation of material adverse change clauses. The decision in Cosette Pharmaceuticals, Inc v Mayne Pharma Group Limited [2026] NSWCA 215 clarifies that, absent explicit contractual language to the contrary, all financial consequences, including those stemming from discretionary business decisions like cost reductions, must be factored into MAC assessments. This means that lawyers drafting or litigating M&A agreements, especially those with MAC clauses, must ensure the language explicitly addresses whether and how discretionary cost savings are to be treated in financial impact evaluations.

The ruling also serves as a critical reminder regarding contract affirmation M&A Australia. Companies seeking to terminate a deal must exercise extreme caution to avoid any actions that could be construed as affirming the contract. Such actions, even seemingly procedural ones like supporting a shareholder meeting, can inadvertently waive termination rights, as demonstrated by Cosette's conduct in this scheme implementation deed dispute. The case underscores the necessity for meticulous attention to both the wording of M&A contracts and the conduct of parties throughout the transaction lifecycle.

Lawyers drafting or litigating M&A agreements, particularly those involving material adverse change (MAC) clauses, must ensure the language explicitly addresses whether and how discretionary cost savings are factored into financial impact assessments. This ruling clarifies that, absent specific drafting, all financial consequences, including those from discretionary business decisions, will be considered. Furthermore, parties seeking to terminate a deal must be vigilant to avoid actions that could be construed as affirming the contract, as such actions can waive termination rights.

Source: Original reporting via Australasian Lawyer.