An open letter to The Hon. Dr. Jim Chalmers MP

The Hon. Dr. Jim Chalmers MP
Unit 2A, Logan Central Plaza
Logan Central, Queensland, 4114

03/11/2025

Dear Dr Chalmers,

We are writing to implore you to reconsider your recent preliminary view that the acquisition of Mayne Pharma Group Limited by Cosette Pharmaceuticals, Inc. would be contrary to the national interest.

We have over a decade of experience as an active capital markets participant. We have invested in more than 500 change of control transactions of ASX listed companies in that time. We have serious concerns that the preliminary view you have reached on the Mayne Pharma transaction has precarious implications that extend far beyond this transaction.

There is a serious risk of undermining the stability and integrity of our capital markets if the deal is blocked. We respectfully submit that there is a far greater national interest at stake in preserving the proper functioning and good-standing of our capital markets over the (regrettable) potential loss of jobs at a single manufacturing site in South Australia – as for which we say there is a simple remedial solution open to you. If the stability and integrity in our capital markets is lost, we undermine Australia as a vibrant and desirable economy attractive to foreign investment.

To contextualise our position, and as widely covered in the media, Mayne Pharma and Cosette have spent five months in front of Justice Ashley Black in the Supreme Court of New South Wales to determine whether Cosette’s attempts to terminate the scheme of arrangement between the two parties were valid. Justice Black found overwhelmingly in favour of Mayne Pharma In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204.

Justice Black’s judgement sets a welcome precedent that strengthens Australia’s M&A laws and regulation. It was widely endorsed by advisers, lawyers, and market participants alike. His findings establish a very high bar for a bidder to be absolved of their contractual obligations under a scheme implementation agreement, and rightly so. If a bidder was able to walk from their contractual obligations with relative ease, I’m sure you would agree it would increase moral and commercial hazard, and hamper deal activity.

For you to now block this transaction would play right into the hands of Cosette's contrived, self-serving fall-back strategy of, "Even if we lose in Court, we'll just change our publicly stated commercial intentions about Mayne Pharma's Salisbury facility to create concerns that will resonate with the South Australian Government and the Treasurer". Don't fall for this spurious, dubious tactic.

Here, the specific national interest issues you have identified have arisen from a contrived change in position by Cosette after it had attempted to terminate the scheme of arrangement (which attempt the New South Wales Supreme Court overwhelmingly found to be invalid). Permitting a strategy of deliberate self-sabotage by a reluctant foreign bidder establishes an unwelcome precedent pathway for any future foreign bidder to subvert the entire Australian legal framework that governs such transactions. This would be a catastrophic hammer blow to the integrity of, and confidence in, our M&A regime.

Clause 3.3(a)(vii) of the scheme implementation deed prevents Cosette from taking “any action or omit to take any action that would or would be reasonably likely to prevent or materially hinder the satisfaction of the Regulatory Approvals.” Section 8.3(b) of the Scheme Booklet released on 15 May 2025 confirms that Cosette intended, in its own words, to “continue the business and operations of Mayne Pharma largely in the same manner as it is currently operated.”

A subsequent change by Cosette in this publicly stated intention offends contractual obligations it readily and willingly entered in to in February 2025. It also makes a mockery of public disclosures made to Mayne Pharma shareholders and the broader market as a whole, on which they have relied in making decisions to buy, sell or hold Mayne Pharma shares. If you decide to block this transaction due to Cosette's spurious and belated change in position, this will serve as a "green light" that this is an acceptable form of commercial conduct from not just Cosette, but any future foreign bidder that may wish to reconsider its position. It would also deprive Mayne Pharma and its shareholders of the appropriate protections and rights to recompense against a wilful breach of legal contract. Deal uncertainty would materially increase, target companies would be more reluctant to entertain foreign buyers, and capital markets would be far less willing to support such transactions. All of which is manifestly contrary to the national interest.

Cosette's threat to close the Salisbury facility is also an economically irrational one. The book value alone is worth $82m in Mayne Pharma’s financial statements and generated $7.5m in direct profit contribution in FY25. Cosette is well aware of this, remembering that it conducted full due diligence on Mayne before signing up in February 2025 to buy the company. It is inconceivable that Cosette - with such sophisticated financial sponsor backing in Avista and Hamilton Lane - would immediately look to close a profitable enterprise in Salisbury without considering the obvious alternative of a sales process before doing so. It is also inconceivable that there wouldn’t be any number of suitable buyers interested in taking on stewardship of this excellent facility. As you would appreciate, most buyers would look to continue the operations of Salisbury, which would entail retaining all or most of its workforce.

Cosette had previously argued in court that receipt of, and response to, a TGA Letter on 4 April 2025 for the Salisbury facility had contributed to a Material Adverse Change in Mayne’s business. In less half an hour of directionless cross examination, all Cosette managed to prove was that the required improvements to systems and reporting had minimal one-off or ongoing operational expenditure impact. By closing remarks, Cosette had dropped that limb of their case. It is absolutely telling that Cosette were unable to establish a lack of economic viability of the Salisbury facility in a court of law, to the extent it wasn’t even pressed as a final submission.

With the benefit of these observations, we reiterate our strong concern that your preliminary view to block this transaction poses a threat to Australia's national interest that is far greater than the threat to the national interest that underpins your preliminary view - even if one makes the generous assumption that Cosette's threat to close Salisbury is a credible, commercially rational one and not a contrived, self-serving one. Properly functioning capital markets and a robust legal and regulatory framework are critical to ensuring Australia remains a favourable destination for foreign investment.

Mr Treasurer, it is self-evidently destabilising and inimical to the integrity and proper functioning of our capital markets for you to stand by and countenance the FIRB process being manipulated and weaponised. Cosette, as a foreign acquirer, is exploiting FIRB as an easy avenue to evade its otherwise contractually binding obligations, as recently upheld by the New South Wales Supreme Court. How does that risk arise? The answer is simple: by any future foreign bidder that gets cold feet then following Cosette's blueprint of spuriously changing its previously publicly disclosed intentions in a manner that is deliberately calculated to raise national interest concerns that FIRB readily falls for.

Don't play into Cosette's hands and give it precisely what it wants – a get out of jail free card, stamped by you as Federal Treasurer. The far safer, logical path is for you to approve this transaction without conditions or with appropriately calibrated conditions around the Salisbury facility; namely, either that it be retained or, if Cosette truly wishes to close it down, that it initiates an orderly sale process for it. Treasury’s Guidance Note 11 explicitly guides for the conditioning of approval in this manner, particularly with a view to the impact on the economy and community.

In this regard, we note Clause 3.3(a)(vii) of the scheme implementation deed which Cosette signed in February 2025. It prevents Cosette from taking “any action or omit to take any action that would or would be reasonably likely to prevent or materially hinder the satisfaction of the Regulatory Approvals.” We say that Cosette not constructively offering to initiate an orderly sales process for the Salisbury facility (if Cosette is really intent on closing it), and not giving Mayne Pharma permission to engage with FIRB on the Salisbury facility both generally and on the identified national interest concerns arising from Cosette's belated change of intention, are all actions that are deliberately calculated to frustrate the satisfaction of the FIRB approval conditions and are therefore fundamentally inconsistent with the above obligation.

We endorse the Australian Financial Review's characterisation of Cosette's manipulation of the FIRB process here as "despicable" - Despicable FIRB ploy undermines Chalmers’ foreign investment pitch

If you block this transaction, there is a broader, more nefarious risk that extends well beyond other foreign bidders emulating the Cosette blueprint of, "I've now changed my mind, let’s bypass the entire legal system and just concoct some ugly new intentions for how I'll conduct the target's business in the future to invoke the FIRB get out of jail free card".

The broader, more nefarious risk is this; foreign entities that act as competitors could enter into a contractually binding scheme implementation agreement under the false pretence of buying an Australian company at an attractive premium. Instead, their true purpose is to obtain due diligence access to intimate knowledge of the Australian target company’s financial and competitive positioning, sensitive customer data, and unique technology. They then engineer a walk-away right by spuriously changing their previously publicly disclosed intentions in a manner that is deliberately calculated to raise national interest concerns. FIRB then blocks the deal in response to those national interest concerns. The foreign bidder happily accepts FIRB's decision to block, walks away and then commercially exploits the insights gained from a contrived transaction process that the foreign bidder never had any genuine intention in proceeding with.

The "change of mind" risk that we have here with Cosette, and the broader, more nefarious risk outlined in the preceding paragraph are so acute that, going forward, if you block this transaction Australian target companies may have little confidence that the relevant regulatory and legal frameworks will afford them appropriate protections against a bidder subsequently shirking its contractual responsibilities. Hedge funds, such as ourselves, that are active participants in merger arbitrage strategies, and who are generally conducive and integral to successful deal activity, will prefer instead to invest in alternate jurisdictions with more robust, certain legal and regulatory frameworks.

We implore you to reconsider your preliminary position considering the above, whether that be with an unconditional “no objection” statement to the deal proceeding, or a “no objection” statement that is conditional on either maintaining the ordinary course operation of the Salisbury facility, or an orderly formal sales process of the asset.

Yours sincerely,

Luke Cummings and Ben Bailey

Chief Investment Officer and Portfolio Manager, respectively.

Harvest Lane Asset Management Pty Ltd