It’s not just the government who’s coming for your investment savings – beware private equity firms behaving badly

With apologies to our Australian PE ‘friends’[1] who generally do what they undertake to do, international PE firms (and/or the organisations they sponsor) seem to believe a binding contract is only binding up until the point that it no longer suits them.

A recent case in point is the proposed acquisition of Mayne Pharma (MYX.ASX) by US private equity backed Cosette Pharmaceuticals.

By way of background, Cosette have agreed to acquire Mayne Pharma via a scheme of arrangement at $7.40 per share, with the scheme implementation deed between the parties signed in late February 2024.

A lot has changed in the world since late February (!) so, it makes sense that Cosette might want to back out of or re-price the deal. The problem for Cosette is that they objectively can’t.

Under an agreed scheme, there are generally a pre-agreed set of circumstances whereby a bidder may in fact attempt to renegotiate or otherwise rescind their offer. This is broadly captured by what is known as a Material Adverse Change (MAC) clause. Sadly, for Cosette, buyer’s remorse and/or bad timing aren’t generally included!

The onus of proof in invoking a MAC is with the buyer (Cosette in this instance). Cosette and their lawyers would do well to review the circumstances of Metlifecare (MET.NZ) whereby Swedish private equity firm EQT had a similar case of buyers’ remorse in March 2020 and tried to allege a MAC breach in order to back out of their agreed deal to acquire Metlifecare at a price of NZ$7 per share. What EQT hadn’t counted on was that the company would not simply rollover and instead (with the support of its shareholders), Metlifecare effectively said “we’ll see you in court”. EQT proceeded with the acquisition several months later.

Cosette and their lawyers might also wish to familiarise themselves with the Supreme Court of NSW declaration on 17 November 2022 in relation to the agreed scheme of arrangement between Pendal (PDL.ASX) and Perpetual (PPT.ASX) whereby the court declared that should Perpetual seek to walk away from their agreed scheme with Pendal (which they were very much seeking to do at that time) ‘that it would be open to Pendal to seek orders to enforce Perpetuals’ obligations to complete the scheme, including by way of injunctive relief or orders of specific performance’. Perpetual saw the writing on the wall and completed its acquisition of Pendal soon thereafter.

Of course, it’s entirely possible that Cosette are already well aware of these potential remedies as the Mayne Pharma scheme booklet specifically references such remedies as being available. We are amused to see media rhetoric (and a share price) that suggests that Mayne’s deal with Cosette is already dead and that Cosette can simply pay a break fee to Mayne and walk away. The market was similarly convinced that Perpetual was entitled to do the same and Pendal shares at one stage traded at a discount of as much as 40% to the terms agreed with Perpetual. Easy money for anyone who had faith that a contract is indeed a contract and that the court will seek to uphold them where applicable.

So, let’s briefly consider the facts as it relates to MYX and Cosette:

As we understand (based on what MYX has disclosed to the market), on 17 May, Cosette sent MYX a letter asserting that a Mayne Material Adverse Change had occurred. Mayne also tells us that The Cosette Notice does not currently quantify the full financial impact of the cumulative matters that Cosette asserts constitute a Mayne Material Adverse Change (being Mayne Pharma’s trading performance, including the circumstances associated with the Mayne Pharma 22 April 2025 earnings update, the previously disclosed litigation with TXMD, and certain correspondence with regulators including the FDA Untitled Letter disclosed by Mayne Pharma on 14 May 2025).

In our view, this is where it gets interesting…

Mayne Pharma released a business update on 22 April whereby Mayne Pharma CEO and MD, Shawn Patrick was quoted as follows:

Although January and February were challenging, we saw a rebound in our underlying EBITDA for March, which we anticipate continuing through Q4 FY25, with the overall underlying EBITDA in FY25 expected to show growth on FY24.”

So, we know that January and February were ‘soft’ and that things rebounded in March.

We also know that presumably April and May revenues are broadly as expected because Mayne told us as much in their ASX announcement on 21 May:

Mayne Pharma maintains its position that all information relevant to the financial position of Mayne Pharma has been disclosed to market in the earnings announcement released on 22 April and that there is no new information required to be disclosed in light of the contents of the Cosette Notice

Of note is that Cosette signed the scheme implementation deed (SID) with Mayne on 21 February. Are we really supposed to believe that Cosette weren’t aware of Mayne’s January and February trading performance up to and including that time?

Cosette also reference the previously disclosed litigation with TXMD. Despite TXMD’s claims seemingly being frivolous in nature (and perhaps a final ‘hail mary’ for a company with negligible remaining cash at 31 December 2024), the quantum of the claim is almost certainly not material but more importantly, is historic in nature and has no impact on Mayne’s ongoing maintainable earnings (to which the MAC relates). It’s hard to see how Cosette could successfully argue otherwise.

That brings us to the FDA Untitled Letter which Mayne viewed as so immaterial as to not even bother announcing it to the market at the time of receipt. Similarly, the Independent Expert did not view it as material in arriving at his/her valuation of MYX shares in support of the scheme. Not content to take Mayne or the Independent Experts word for it, we similarly conducted our own research by speaking to industry experts regarding the significance of such a letter and consensus was ‘storm in a teacup’. Furthermore, we could find no evidence of any pharma company having previously received such a letter which then led to a meaningful reduction in sales thereafter. Mayne need simply update their presentation and marketing materials such that the claims the FDA objected to are removed and then it’s a simple case of play on. Given their standing in the pharma industry, it seems highly likely that Cosette would take a similar view (albeit they may not currently wish to admit as much).

With all of the above in mind, we must consider whether or not a MAC is likely to have occurred noting that the MAC is defined as follows:

Any event, occurrence, change, circumstance or matter, whether occurring before, on or after the date of this deed, which has, has had or is (either individually or when aggregated together with any such other events, occurrences, changes, matters or circumstances) 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 A$10.76 million, other than any event, matter or circumstance:

(c) Fairly Disclosed in the Due Diligence Material (or which ought reasonably to have been expected to arise from a matter, event or circumstance which has been Fairly Disclosed)

Hmmmm not looking great for Cosette so far…

But what about tariffs you may ask or perhaps the recent Trump Executive Order with respect to prescription drug prices (which it should be noted is thus far very low on detail, may never happen and even if it does, it’s unclear how any such changes would affect MYX)? Surely Cosette could point to those things as having the potential to breach the MAC? They could indeed if not for the following MAC carve outs:

(e) arising from any change in any law, regulation or rule of a Government Agency or accounting standards;

(f) arising from general economic or political conditions or changes in those conditions (including financial market fluctuations, changes in interest rates, commodity prices or foreign currency exchange rates) on or after the date of this deed

Still not looking great for Cosette…

All of the above notwithstanding, Harvest Lane was present in court last week for the approving of the convening of the scheme meeting of Mayne Pharma shareholders to consider and vote on the scheme (colloquially referred to as ‘the first court date'). Registration of the scheme booklet occurs concurrently and is made available to shareholders soon thereafter.

At that meeting (amongst other things), the bidder (Cosette) warrants that they have funding available to satisfy their obligations under the scheme. In the case of Cosette, they are funding the acquisition via a mix of equity and debt specifically and per the scheme booklet (page 65) warranted as follows:

As at the date of this Scheme Booklet, Cosette and Monarch Parent are not aware of any reason why the conditions to the Debt Financing would not be satisfied to enable the facilities to be drawn for the purpose of funding the Scheme Consideration.

Which now brings us to the conditions to the Debt Financing which Cosette tell us (also on page 65) are as follows:

The provision of the Debt Financing is subject to certain customary conditions precedent that include, among others:

• no occurrence of a Mayne Material Adverse Change or Mayne Prescribed Occurrence between 20 February 2025 and 8.00 am (AEST) on the Second Court Date;

So, here we have a situation where Cosette has specifically told us that as of 15 May they are not aware of any reason why the conditions to the debt financing would not be satisfied and yet we know that one of those conditions is no occurrence of a Mayne Material Adverse Change.

Cosette also signed a Deed Poll on that same day covenanting in favour of Mayne Pharma shareholders to pay the scheme consideration so, either Cosette knowingly lied to the court (unlikely) or they were of the belief that as of Friday morning (15 May) that no Material Adverse Change had occurred.

The question, dear reader, then becomes, how exactly is it possible that in the opinion of Cosette there was no MAC breach as of Friday but one had become apparent by Sunday!

Despite having spent quite a lot of time in the USA, I can’t always work out what slang/terminology transcends our borders versus that which is known only in Australia but what we have here is seemingly a good old fashioned ‘Try On’.

The company and its advisers have event driven funds (not dissimilar to ours, but excluding us) practically begging them to negotiate a lower price with Cosette such that the scheme proceeds, and media coverage to date has essentially been written as if the deal is dead already.

What nearly everyone is missing is that (based on available information) Cosette has zero grounds to walk away from the transaction nor to request that the deal is repriced.

Cosette may very likely have buyer’s remorse. They may be worried about Trump’s tariffs and/or his pharma Executive Order. They may be worried about the outlook for the global economy and it’s entirely plausible that they are getting pressure from their private equity sponsors to negotiate a better deal or walk away altogether but none of that matters – it does not trigger a MAC (as defined in the SID) and Cosette will have a great deal of difficulty proving that it does.

A contract is a contract and should be honoured irrespective of whether the buyer is Australian, American, PE backed or otherwise. Cosette have a legally binding deal to acquire Mayne Pharma at $7.40 per share and Mayne Pharma has every right to enforce it.

Any price reduction that Mayne agrees to will almost certainly be as a gesture of goodwill in the interests of a productive ongoing working relationship post-acquisition and not out of any legal obligation to do so (and personally I’d like to see them hold their ground).

If Australian companies and their shareholders (or the courts) are willing to allow bidders to simply walk away from schemes of arrangement whenever the mood takes them it makes a complete mockery of Australia’s M&A regime (and contract law more broadly). If shareholders cannot have faith that a bidder will be made to do what they say they will do (and legally warrant to do) then a tax on unrealised superannuation gains might be the least of our problems.