Material Adverse Change clauses: how much protection do buyers really have?

Material adverse change or effect (MAC) clauses are a common feature in M&A transactions, especially in the public M&A space. These clauses are intended to protect buyers by allowing them to walk away from a transaction if a significant negative event affects the target company between signing and closing. In theory, MAC clauses provide a safeguard against unexpected developments following signing that could undermine the value of the target. However, in practice, their effectiveness for buyers is often limited (as further explained below).

Types of MAC clauses

In Australian public M&A transactions, the absence of a MAC is commonly included as a condition precedent to completion of a transaction. By contrast, in private M&A transactions, MAC conditions are used more selectively and are often the subject of significant negotiation.

A well-drafted MAC clause typically operates by referencing events, changes or circumstances that, individually or in combination, have had or could reasonably be expected to have, a material adverse impact on the target’s business, financial condition or operations. MAC clauses often incorporate one or both of the following types of triggering mechanisms:

• Quantitative thresholds: These triggers are tied to measurable financial metrics, such as a diminution in the target’s EBITDA, consolidated net assets, or revenue beyond a specified percentage or figure. This approach provides a degree of certainty and predictability as to when the clause may be enlivened.

• Qualitative thresholds: These clauses are broadly worded, often referring to the occurrence of a "material adverse effect" or "material adverse change" on the target's business, without providing a specific definition or any explicitly stated numerical criteria. While they offer greater flexibility, they may also give rise to interpretive uncertainty as a result of its inherent subjectivity. It is not uncommon for the defined term “material adverse change” to appear in the clause itself, even though it risks circularity.

A crucial aspect of negotiation in M&A transactions are the carve-outs to a MAC clause, which are categories of risks that are explicitly excluded from constituting a MAC. These exclusions typically include events that are industry-wide or macroeconomic in nature, changes in law, acts of war or terrorism, pandemics, or any matters disclosed or contemplated at the time of signing.

Careful drafting of MAC clauses is critical. Buyers may seek broader triggers and narrower carve-outs to preserve optionality, while targets typically aim to confine the MAC to highly specific, business-critical risks and broaden the carve-outs. In practice, invoking a MAC clause successfully to terminate a deal remains challenging and often results in disputes. The precise wording of the clause and the factual matrix will be determinative.

In some cases, the parties may agree to include a warranty from the target stating that, to the best of its knowledge, there are no existing facts, matters, or circumstances reasonably likely to result in a material adverse change. Although narrower in scope than a full MAC condition, this type of warranty still offers the buyer a degree of protection.

Australian courts have provided limited judicial guidance on the interpretation of MAC clauses in M&A transactions. In the absence of extensive domestic authority, it is useful to draw on guidance from other jurisdictions such as the United States and the United Kingdom. While not being binding in Australia, decisions from these jurisdictions indicate that a MAC typically requires a change that is objectively material and durationally significant, assessed in the context of the transaction as a whole.^[1] Minor, temporary, or short-term downturns, particularly those arising from ordinary business cycles, are typically insufficient to constitute a MAC.

ASIC's view of MAC clauses

MAC clauses in public M&A transactions are subject to close scrutiny by the Australian Securities and Investments Commission (ASIC), which continues to emphasise the importance of framing such clauses with objective and quantifiable standards. This ensures that all parties to the transaction, including shareholders, can assess with reasonable certainty whether a material adverse change has occurred.

ASIC takes the view that MAC clauses containing subjective or vague thresholds can undermine the principle of an informed market. When the specific events or changes that may trigger the clause are unclear, there is a risk that the buyer and target may adopt divergent interpretations as to whether a MAC has in fact occurred. The absence of a clearly defined, measurable threshold can create confusion and potentially mislead shareholders, particularly when assessing the likelihood of the transaction proceeding. Accordingly, ASIC expects target companies to provide clear and meaningful disclosure regarding the terms and risks of the offer, including the operation and potential consequences of any MAC condition.

ASIC's comments were made in response to a MAC clause in the Vimy Resources scheme, which was triggered by any event, matter or circumstance having a material adverse effect on Vimy’s assets, liabilities, financial position or business, taken as a whole (Re Vimy Resources Ltd [2022] WASC 233). ASIC expressed concern that aspects of the clause were overly subjective or self-referential, potentially leading to ambiguity. As a result, additional risk disclosures were required in the scheme booklet to clarify for securityholders that, in the absence of a clear quantitative benchmark, the bidder and target could reasonably adopt differing interpretations as to whether the MAC condition had been triggered. This, in turn, could increase the risk of dispute or uncertainty around the satisfaction of the condition. The inclusion of such risk disclosures has since become common practice in public M&A transactions where qualitative MAC clauses are used.

The Mayne Pharma dispute

A recent high-profile dispute involving the interpretation of a MAC clause is the ongoing matter between Mayne Pharma Group Limited (ASX: MYX) and US-based Cosette Pharmaceuticals, Inc.. Cosette sought to terminate the Scheme Implementation Deed (SID) under which it had proposed to acquire all shares in Mayne Pharma via a scheme of arrangement, citing a material adverse change in Mayne Pharma’s financial performance. The case underscores the challenges buyers face when seeking to rely on a MAC clause.

Cosette's purported termination of the SID

On 17 May 2025, Cosette issued a notice alleging that a "Mayne Material Adverse Change" (as defined under the SID) had occurred, citing:

• Mayne's trading performance, including a disappointing third-quarter earnings update;

• ongoing litigation with TherapeuticsMD Inc.; and

• correspondence from the U.S. Food and Drug Administration (FDA) regarding promotional materials for Mayne's contraceptive drug, Nextstellis.

A "Mayne Material Adverse Change" included a quantitative threshold, defined in the SID as matters “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 $10.76 million”.

Cosette asserted that, as a result of the asserted Mayne Material Adverse Change, the obligation for the parties to engage in prompt, good faith consultations for 10 business days was triggered under the SID. Mayne Pharma responded by rejecting the assertion that a Mayne Material Adverse Change had occurred, stating that the events cited did not meet the definition of a MAC as outlined in the SID.

Following the consultation period's expiration, Cosette issued a notice purporting to terminate the SID as a result of a Mayne Material Adverse Change. Additionally, if the termination based on the occurrence of a Material Adverse Change were found to be invalid, the notice included an alternative ground for termination on the basis that Mayne Pharma had breached a representation and warranty, specifically, the one concerning the accuracy and completeness of due diligence materials, claiming that Mayne Pharma either knowingly withheld or omitted information that could reasonably be expected to be material to Cosette's evaluation of the Mayne Group and the merits of the proposed transaction. Cosette has also alleged Mayne Pharma has engaged in misleading or deceptive conduct in breach of the Australian Consumer Law.

Mayne Pharma's position

Mayne Pharma has rejected the validity of the termination notice and consistently disputed Cosette's claims, asserting that no Material Adverse Change, as defined in the SID, has occurred. The company emphasised that all relevant information had been disclosed, including the earnings update on 22 April 2025. Furthermore, Mayne Pharma received a letter from the FDA confirming that issues identified in the earlier correspondence had been addressed.

Mayne Pharma has commenced proceedings in the New South Wales Supreme Court (currently listed for a hearing commencing on 18 September 2025 with Justice Black presiding) which will determine whether or not the SID has been validly terminated by Cosette. This will inevitably require Cosette to demonstrate that the matters it claims constitute a Mayne Material Adverse Change have, in fact, triggered the quantitative threshold set out in that definition.

Notwithstanding, the scheme meeting on 18 June 2025 went ahead and shareholders of Mayne Pharma passed the resolution approving the scheme by the requisite majorities.

The Mayne Pharma case underscores the significant challenge buyers face in successfully invoking a MAC clause to terminate a transaction. The dispute remains ongoing, with both parties navigating complex contractual obligations. The outcome will likely turn on the interpretation of the MAC clause and the specific facts surrounding the alleged breaches. Ultimately, it remains to be seen whether Mayne Pharma will prevail in its legal proceedings and establish that the SID was not validly terminated by Cosette.

M&A transactions where a MAC has been invoked

In Australia, successfully invoking a MAC clause remains exceptionally rare. Both the courts and the Takeovers Panel have consistently applied a high threshold for activation, with MAC clauses more commonly serving as commercial levers for renegotiation rather than genuine walk-away rights.

The first major judicial consideration of a MAC clause in Australia occurred in the early 1980s, when Woolworths declined to declare its A$186 million off-market takeover offer for Grace Bros free from a MAC condition, citing a significant deterioration in the target’s financial performance. Woolworths then terminated all contracts arising from acceptance of its takeover offer. The NSW Supreme Court upheld Woolworths’ right to rely on the MAC condition and accordingly its right to terminate the contracts arising from the acceptance of the takeover offer. However, it should be noted the trigger for the MAC condition was the occurrence of events which “in the opinion of Woolworths” were materially adverse.^[2] This remains the only Australian case where a court has clearly endorsed a bidder’s right to walk away on a MAC clause.

Since then, courts and regulators have shown continued reluctance to permit MAC-based terminations. For example, in 2010, Paladin Energy sought to abandon its off-market takeover of NGM Resources following the abduction of NGM personnel by terrorists in Niger, where NGM held key uranium assets. The abductions took place 240km and 150km from NGM's assets. Paladin claimed the incident triggered both a force majeure and MAC clause. The Takeovers Panel disagreed. The Panel held that Paladin had failed to demonstrate a material adverse effect, and ordered that the bid proceed. The Panel clarified that even in the absence of an explicit materiality threshold, only truly significant events justify withdrawal under a MAC.

Despite their presence in many transaction documents, MAC clauses have rarely been formally invoked so as to unilaterally terminate a transaction. In practice, however, they have been relied upon to the buyer's advantage. The following recent transactions highlight how MAC claims have played out in practice, and collectively underscore the challenges in strictly relying on MAC clauses, and the practical preference of parties to resolve disputes through commercial negotiation rather than litigation.

Link Administration Holdings / Dye & Durham (2021/2022)

Overview

In December 2021, Dye & Durham (D&D) announced its proposed acquisition of Link Administration Holdings Limited (Link) at A$5.50 per share. Following signing, D&D was made aware of one significant contract of Link's business which was up for renewal and subject to a request for proposal process, which if not renewed, would result in an EBITDA diminution potentially constituting a "Link Material Adverse Change".

Type of MAC condition

Quantitative MAC with specific carve-outs – a “Link Material Adverse Change” was defined to include any event, matter or circumstance that either occurred after signing, or already existed but only becomes known after signing which would have the effect of diminishing certain quantitative EBITDA and net asset triggers. The diminution in the consolidated EBITDA triggers were made clear not to be on a one off basis.

Outcome

Link rejected that the renewal process of one of its significant contracts would result in an EBITDA diminution that would constitute a Material Adverse Change. The transaction faced further uncertainty after the UK Financial Conduct Authority (FCA) indicated that Link’s UK subsidiary, Link Fund Solutions, could be liable for a redress payment of up to £306 million (approximately A$519 million) in connection with the collapsed Woodford Investment Fund in 2019. The FCA provided approval for the transaction, subject to a condition that D&D commit to make funds available to meet any shortfall in the amount available to cover the redress payments that Link Fund Solutions may be required to make. Under the scheme implementation deed, approval from the FCA on an unconditional basis, or on terms that are acceptable to D&D acting reasonably, was a condition precedent to the scheme. D&D subsequently came to the view that it could not accept the FCA conditions and proposed revised terms for the acquisition of Link, including a price reduction and a contingent payment depending on the outcome of the FCA enforcement process. Link rejected the revised proposal and the scheme was terminated by mutual agreement.

Carlyle / Pioneer Credit (2020)

Overview

On 5 December 2019, the parties entered into a scheme implementation agreement with The Carlyle Group (Carlyle) to acquire Pioneer Credit Limited (Pioneer) at A$1.82 per share. The transaction faced uncertainty due to financial stress at Pioneer during the peak of COVID-19 and Carlyle seeking additional information on Pioneer's business operations and performance which was said to have been withheld.

Type of MAC condition

Quantitative and Qualitative MAC with specific carve-outs – a "Pioneer Material Adverse Change" was defined to include any change, event, circumstance or occurrence that had occurred before, on or after the date of the agreement which would have resulted in a reduction in the value of consolidated net assets or consolidated annual EBITDA of the Pioneer group, or a material adverse effect on any material licence, permit or authorisation held by the Pioneer group, subject to customary carve-outs for disclosed matters, legal and contractual requirements, bidder-approved matters and events such as war or terrorism.

Outcome

Carlyle alleged that a Pioneer Material Adverse Change had been triggered as a result of COVID-19–related trading impacts and provided Pioneer with notice of its intention to terminate the scheme implementation agreement. Pioneer refuted this but terminated the agreement, on the basis that ongoing discussions with Carlyle had become protracted and the scheme would not become effective by the "Sunset Date". Ultimately, Carlyle’s position as an existing lender to Pioneer gave it commercial leverage to achieve this negotiated outcome.

Scottish Pacific / CML Group (2020)

Overview

On 2 March 2020, CML Group Limited (CML) (now EarlyPay Ltd) announced that it had entered into a scheme implementation deed with Scottish Pacific Group Limited (Scottish Pacific), under which Scottish Pacific proposed to acquire 100% of CML's issued share capital for total cash consideration of A$0.60 per share. The deed was signed shortly before the onset of COVID-19, which resulted in significant uncertainty for the transaction.

Type of MAC condition

Quantitative MAC with specific carve-outs – a “Material Adverse Effect” was defined to include any event, occurrence or matter that either occurred after the date of the implementation deed or occurred prior to that date but was only announced or publicly disclosed afterwards, which would have the effect of diminishing certain quantitative EBITDA and net asset thresholds, subject to carve-outs including fairly disclosed matters, changes in law, general economic and business conditions and bidder-approved matters.

Outcome

On 24 April 2020, Scottish Pacific issued notices to CML raising concerns that certain events may have occurred which constituted a Material Adverse Effect on CML's business for the purposes of the scheme implementation deed. CML was put in a trading halt while the parties engaged in good faith discussions in relation to the concerns raised. The CML board announced on 13 May 2020 that it did not consider CML to be in breach of the deed, nor that any event had occurred which constituted a material adverse effect on CML's business for the purposes of the deed. Notwithstanding, the scheme was subsequently terminated by mutual agreement, with the parties entering into a deed of termination and settlement with mutual releases of the parties from their obligations and without any admission of liability and without conceding the validity or merit of the relevant claims or defences on the part of either party. In connection with the termination, Scottish Pacific paid A$1 million to CML in recognition of the costs incurred in pursuing the transaction. In CML's announcement, it noted that the CML board did not believe that CML was in breach of the scheme implementation deed, and did not believe that any event had occurred which constituted a material adverse effect on CML’s business for the purposes of the scheme implementation deed. The board noted the significant practical challenges that CML would need to overcome to progress a scheme transaction with a bidder which wished to terminate the scheme. The board considered that this was likely to be an expensive, protracted process, causing ongoing disruption to CML’s business and with no certainty that a transaction would complete. In these circumstances the CML board determined that it was in the best interests of the company and its shareholders to terminate the transaction by mutual agreement.

EG Group / Oliver’s Real Food (2020)

Overview

On 11 March 2020, EG Fuel Co (Australia) Limited (EG) entered into a scheme implementation deed to acquire all shares in Oliver’s Real Food Limited (Oliver's) at A$0.10 per share. Shortly after, Oliver’s announced the temporary suspension of its operations due to the escalating impact of the COVID-19 outbreak, resulting in an increase in net indebtedness from A$0.6 million to A$0.91 million. Oliver’s sought a waiver of the specific net-debt condition under the scheme implementation deed (which had been included in addition to a MAC condition). EG refused, triggering negotiations between the parties on how to proceed.

Type of MAC condition

Quantitative and Qualitative MAC with specific carve-outs – a “Material Adverse Change” was defined to include any matter, event or circumstance which was announced or became known to EG after the execution of the deed, which would have had the effect of diminishing consolidated EBITDA, having regard to events and circumstances impacting Oliver's earnings that were known to EG, announced to the ASX or that had arisen prior to execution of the deed (specifically, including the Coronavirus outbreak).

It also included matters that diminished consolidated net assets, and termination of material contracts or IP rights, as well as a general, qualitative MAC, namely, any material adverse effect on the business, assets, liabilities, financial or trading position, profitability or prospects of the group as a whole.

Outcome

On 24 April 2020, Oliver's announced that its net indebtedness had increased by approximately A$0.31 million and absent a waiver by EG of the condition precedent requiring Oliver's net debt not to exceed A$800,000, the scheme would not proceed. As pandemic effects were carved out of the EBITDA trigger for the MAC clause, EG did not invoke it, but instead leveraged the failure to satisfy the net-debt condition (A$800,000 cap) to terminate the scheme. On 25 May 2020, Oliver's announced that the parties mutually agreed to terminate the scheme implementation deed and had agreed to alternative arrangements – the entry by Oliver's into an exclusive long term supply agreement and IP licence with EG to supply EG's petrol and convenience outlets in Australia, with its branded "Olivers Food to Go" offering.

McMillan Shakespeare / Eclipx Group (2018-19)

Overview

On 8 November 2018, McMillan Shakespeare Limited (McMillan) and Eclipx Group Limited (Eclipx) entered into a scheme implementation agreement for McMillan to acquire all Eclipx shares, with the offer comprising 0.1414 McMillan shares plus AUD$0.46 in cash for each Eclipx share, valuing each Eclipx share at AUD$2.85. The transaction faced uncertainty when, on 20 March 2019, Eclipx announced a series of earnings downgrades, disclosing, among other things, a 42.4% fall in net profit after tax and amortisation (NPATA) and significant issues in the Right2Drive and Grays divisions, indicating it no longer expected to meet its FY19 earnings guidance.

Type of MAC condition

Quantitative and Qualitative MAC – an “Elliot Material Adverse Effect” was defined to include an event, occurrence or matter that either occurred after the date of the agreement or occurred before that date but was only announced or publicly disclosed afterwards, which was reasonably likely to have, or to have had, in respect of qualitative factors, a material adverse effect on the business, assets, liabilities, financial or trading position, profitability or prospects of the Elliot group, or, in respect of quantitative factors, to diminish the groups net tangible assets or NPATA.

Outcome

Eclipx was unable to reach agreement with McMillian on the terms of the scheme book (presumably in relation to disclosures around the recent series of earnings downgrades) and requested an extension to the end date to allow further time to complete the necessary steps for the scheme to become effective. McMillian announced that in the circumstances they did not consider that extending the end date would resolve the identified earnings issues, nor did they believe that it was in their best interests. Accordingly, the parties mutually agreed to terminate the agreement, releasing one another from any claims relating to the scheme implementation agreement and the proposed scheme, with Eclipx paying McMillan an $8 million break fee. It is unclear from public sources which contractual right was exercised to terminate the scheme implementation agreement.

Cradle Resources / Tremont Investments (2017)

Overview

On 9 March 2017, Cradle Resources Limited (Cradle) (now Earths Energy Limited) entered into a scheme implementation agreement under which Tremont Investments Limited (Tremont) would acquire all outstanding shares in Cradle for A$0.33 per share. Tremont pursued the transaction to obtain full control of Cradle's Panda Hill niobium project in Tanzania, however, the transaction faced uncertainty shortly after signing, when the Tanzanian Government proposed legislative changes to its mining laws.

Type of MAC condition

Qualitative and Qualitative MAC – a "Material Adverse Change" was defined to include an event, occurrence or matter that occurred after signing, arose earlier but was only announced or publicly disclosed after signing, or was reasonably likely to have occurred after signing and had not been previously disclosed, which would reasonably be expected to have a quantitative effect by diminishing the consolidated net assets, cash or cash equivalents of the Cradle group, or a qualitative effect by materially adversely affecting the status or terms of the "Mineral Rights" or the owner’s ability to exploit them. Specific carve-outs included matters fairly disclosed, change in accounting policy required by law, in connection with the scheme, a general deterioration in world Niobium prices.

Outcome

The scheme implementation agreement was terminated on 3 July 2017 as a result of the proposed changes in Tanzanian law arising from three bills presented to the Tanzanian Parliament, and the imposition of a 1% inspection fee on the value of mineral exports by the Tanzanian Government. At that time, if passed, among other things, the Tanzanian Government would have been entitled to not less than a compulsory 16% free-carried interest in the shares of all mining companies. Cradle noted that, the proposed changes if passed without significant amendment would likely to have an adverse effect on Cradle's Panda Hill niobium project in Tanzania. While Cradle’s ASX announcement did not explicitly refer to the MAC clause being the trigger for termination, it is likely the proposed changes in Tanzanian law triggered the MAC clause.