Material Adverse Change: A high bar

The recent decision in Mayne Pharma Group Limited [2025] NSWSC 1204 serves as a reminder that material adverse change (MAC) clauses require careful consideration when being drafted and have a high evidentiary threshold when seeking to enforce them.

Material Adverse Change – What is it?

MAC clauses:

• in an M&A context, allow a buyer to terminate a contract when, after signing, a significant adverse event occurs in respect of the seller that substantially affects the assets being purchased;
• often contain quantitative thresholds that require the buyer to provide evidence that the assets being purchased have quantitively reduced in value as a result of an adverse event; and
• can be drafted to exclude specific events or pre-disclosed information.

What happened in Mayne Pharma Group Limited [2025] NSWSC 1204?

Mayne Pharma Group Limited (Mayne Pharma) entered into a scheme implementation deed (SID) with Cosette Pharmaceuticals, Inc. (Cosette) for the purchase by Cosette of 100% of the shares in Mayne.

The SID contained a MAC clause which gave Cosette the ability to terminate if a change or event occurred which diminished Mayne Pharma’s ‘consolidated Maintainable EBITDA’ over a 12-month period by at least A$10.76 million. The MAC clause excluded information that was fairly disclosed in due diligence materials.

Cosette served notice to terminate the SID pursuant to the MAC clause, alleging that, among other things, a MAC event had occurred due to a decline in Mayne Pharma’s actual Q3 FY2025 sales performance as compared to the forecast performance contained in the FY25 6 + 6 Forecast report (which was disclosed to Cosette during due diligence). Cosette also sought to rely on a regulatory letter which Mayne Pharma had received which placed restrictions on marketing of a particular product.

The court sided heavily with Mayne Pharma and determined that no MAC had occurred for the following reasons:

• forecast sales performances cannot be classified as an event under the MAC clause, because the forecast does not constitute a decline in the company’s financial performance, only an expectation. Failing to meet a forecast is not itself an adverse change but constitutes evidence of a change;
• the forecasts were ‘fairly disclosed’ in due diligence and the MAC clause was drafted to exclude fairly disclosed information. A disclaimer was provided in respect of the forecast accuracy which assisted the court’s position; and
• although there had been underperformance in the Q3 FY2025 sales, Cosette was unable to establish a specific event, occurrence, change, circumstance or matter that met the quantitative threshold required to trigger a MAC under the SID.

It was determined that Cosette did not validly terminate the SID under the MAC clause.

Important reminders

The decision serves as a reminder that:

• drafting of MAC clauses is particularly important. Notably, drafting of carve outs and thresholds must be clear and precise;
• reliance on MAC clauses requires evidence of an actual event that relates to and satisfies the specific requirements of the relevant MAC clause; and
• the threshold for the court to consider that a MAC has occurred remains significantly high.