Material Adverse Change (MAC) clauses are designed to give buyers a way out of a transaction if something significant happens to a target company before completion. At their core, these clauses are about allocating risk—deciding who bears the consequences when unexpected events threaten the commercial basis of a deal. The purpose of a MAC clause is straightforward: it protects the buyer from unforeseen events that could fundamentally alter the value or viability of the target company. This might include sudden regulatory changes, financial instability, or other serious disruptions that put the transaction’s purpose or feasibility at risk.
In practice, however, Australian courts have made it clear that the threshold for invoking a MAC is high. The recent decision of the Supreme Court of New South Wales (Supreme Court) In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204 reinforces the narrow interpretation Australian courts apply to MAC clauses, making it clear that temporary setbacks, short-term market fluctuations, or isolated regulatory concerns—even those that may attract significant attention—are ordinarily insufficient to justify terminating a transaction. To invoke a MAC, parties must demonstrate a substantial and enduring deterioration in the target company’s business, going well beyond ordinary operational or market challenges.
Mayne Pharma Group Limited (Mayne), an ASX-listed pharmaceutical company, entered into a Scheme Implementation Deed (SID) with Cosette Pharmaceuticals, Inc. (Cosette) for Cosette to acquire all Mayne shares. The SID included a MAC clause, which allowed Cosette to terminate if an event diminished Mayne’s consolidated “Maintainable EBITDA” over a 12-month period by at least A$10.76 million. Cosette sought to terminate the SID, arguing that Mayne’s declining financial performance and regulatory issues—most notably a letter from the U.S. Food and Drug Administration concerning Mayne’s contraceptive product, “Nextstellis” — amounted to a MAC.
The Supreme Court dismissed this argument, finding that neither factor represented a substantial and enduring deterioration in Mayne’s business. Rather, the alleged changes reflected temporary market and operational conditions that fell short of the contractual threshold.
Key takeaways
High threshold for MAC
The Supreme Court confirmed that MAC clauses impose a deliberately high bar for termination and Cosette’s claim, based on missed earnings forecasts and regulatory scrutiny, did not satisfy this test. The judgment clarifies that ordinary earnings volatility or market adjustments—even if material in the short term—do not constitute a MAC unless they meet the specific quantitative threshold.
Materiality and longevity are essential
For a MAC to be invoked, the adverse event must materially affect the long-term viability or profitability of the business. Temporary operational or financial difficulties, even when significant in the short term, generally do not meet this standard. The Supreme Court’s ruling reinforces that MAC clauses are not a loophole for buyers disappointed by post-signing results.
Warranties, disclaimers and disclosures play a key role
The decision also highlighted the importance of context in assessing a MAC claim. The Supreme Court found that forward-looking forecasts provided during due diligence were expressly disclaimed by Mayne, limiting Cosette’s ability to rely on them. Information already disclosed—such as short-term earnings fluctuation—was excluded from the MAC analysis. This illustrates how careful use of disclaimers and comprehensive disclosure can safeguard the target company against post-signing disputes.
Post-signing conduct can affect termination rights
A buyer seeking to rely on a MAC must also act consistently with that position. In this case, Cosette’s subsequent participation in amendment deeds and related court proceedings was interpreted as conduct inconsistent with termination, suggesting an affirmation of the transaction. The Supreme Court’s reasoning underscores that parties cannot simultaneously treat an agreement as terminated and continue to act under it.
Precision in drafting is crucial
The decision underscores the value of clear drafting that can be objectively tested. Vague or general MAC provisions are vulnerable to dispute yet unlikely to be upheld if tested. Effective clauses should clearly define what constitutes a material change, include measurable thresholds, and specify carve-outs for anticipated risks such as regulatory developments or market volatility.
Why it matters
The decision reaffirms that MAC clauses are interpreted narrowly and enforced strictly. To successfully invoke such a clause, a buyer must provide clear evidence of a sustained and quantifiable deterioration—not merely a short-term downturn or external event.
For dealmakers, the case reinforces three practical lessons:
- draft MAC clauses with precision and objective benchmarks;
- ensure warranties, disclaimers, and disclosures are consistent and comprehensive; and
- exercise termination rights carefully— actions taken after signing may undermine or limit the right to terminate.
Ultimately, the decision promotes contractual certainty and discourages opportunistic attempts to walk away from agreed transactions. In an environment of regulatory complexity and market volatility, robust drafting and disciplined post-signing conduct remain the most effective safeguards for both buyers and the target company.
