The multi-threaded drama of the Mayne Pharma scheme of arrangement continues.
Lessons learned so far include the need for more precision in specifying the criteria for material adverse changes (MAC) termination events and practical difficulties in proving them. And given the issues raised by Cosette’s approach to FIRB approval, targets in future deals will likely require pre-agreement and adherence by foreign bidders to their stated intentions in submissions to FIRB.
However, the decision of Black J in the NSW Supreme Court on Mayne’s ‘election’ defence to Cosette’s termination claim is worth particular attention for future deals, not just schemes of arrangement. The principle of ‘election’ is not just a matter of ‘use it or lose it’ – that is, if a party has a termination right it needs to exercise it promptly – there is more to it, particularly in the way the principle was applied by Black J.
In particular, the Mayne case indicates that if a party to a contract does not expressly reserve its right to terminate on the basis of specifically identified grounds at a point that it takes an action which constitutes an affirmation of the contract, the party may not later rely on such grounds to exercise its termination right – possibly, even if the party did not have a right to terminate the contract at the time of that action.
What constitutes an ‘election’
Although similar to the concept of ‘waiver’, the doctrine of election is legally distinct. It requires an ‘unequivocal act’ showing that a party has chosen to pursue one of two (or more) competing rights – such as electing for the continued performance of a contract (i.e. ‘affirming’ the contract) rather than electing to terminate it. If the party elects to continue performance at a point that it has a termination right, it forgoes the termination right.
The subjective intention of the party is not relevant to this assessment. As long as the party is aware of the matters giving rise to the termination right at the time it does the ‘unequivocal act’, it can be taken to have made an election, even if it did not appreciate it was doing so – and even if it did not appreciate that the contract gave it a termination right.
The MAC in the scheme implementation deed
In their scheme implementation deed (SID), the target Mayne and bidder Cosette adopted a largely conventional approach to defining a MAC giving rise to a termination event, to the effect that the cumulative impact of multiple adverse changes would constitute a MAC if collectively they met the materiality threshold, even if they would not meet that threshold when considered separately.
Cosette’s claim and Mayne’s ‘election’ defence
Cosette claimed that there had been an accumulation of adverse developments which taken together met the MAC materiality threshold. The Court found that Cosette was aware of these matters by the time of the first Court hearing to order the scheme meeting (most of them at least six weeks before). Two days after the first Court hearing, Cosette claimed a right to terminate the SID based on those matters. Mayne claimed that steps taken by Cosette before and at the first Court hearing amounted to elections by Cosette to continue with the SID rather than terminate it, so it had foregone its termination right under the doctrine of election.
Cosette’s ‘unequivocal’ acts
As Mayne acknowledged in its submissions, a party is not bound to make an election at once. They ‘may sit and consider their position, provided they do not engage in unequivocal conduct’, although where the ‘right to terminate is an express right under the contract, it must be exercised within a reasonable time’.[1]
That sounds straightforward enough, but the Mayne decision illustrates that the threshold for what constitutes an ‘unequivocal act’ is lower than those words might otherwise suggest.
Firstly, the Court held that Cosette had elected to affirm the SID by agreeing with Mayne (around six weeks before the first Court hearing) to amend the SID. This involved ‘altering the details of the corporate structure of the acquiring entities under the SID, making consequential amendments'. The amending deed also included a conventional recitation that the SID (as amended) ‘is and continues to be in full force and effect’.[2]
Secondly, Black J appeared minded to hold that Cosette’s execution of the usual scheme deed poll also constituted an election to affirm the SID. However, his Honour did not need to reach a concluded position on this point.
Thirdly, the Court held that Cosette elected to affirm the SID by giving input on the scheme booklet and participating in the first Court hearing. Relevant to this conclusion was that Cosette’s General Counsel affirmed an affidavit shortly before the first Court hearing, which included the standard statement that the affidavit was ‘in support of the application by [Mayne] for orders’ in relation to the scheme. Also relevant was that with one exception, Cosette had effectively acquiesced to the scheme booklet not mentioning any of the matters that Cosette later claimed contributed to the MAC.
The exception related to a letter from the US Food & Drug Administration (FDA) that had been received shortly before the finalisation of the draft scheme booklet for the first Court hearing. The letter related to alleged misleading marketing claims by Mayne about its flagship product, so it was plausibly significant. Although brief, there was a description of the FDA letter in the scheme booklet and Cosette drew the Court’s attention to it at the first Court hearing. The Court held this was sufficient for Cosette to reserve its position in relation to the FDA letter specifically.
Black J said:[3]
I am satisfied that the Cosette Parties’ position taken at the first Court hearing (other than in respect of the FDA Letter, where they reserved their position) amounted to an election to continue the arrangements … rather than terminate them.
Election as to grounds for termination
It seems on Black J’s application of the principle of election that, since Cosette had reserved its position on the FDA letter, it could (theoretically) have later exercised its termination right on that ground, but not on the basis of the other matters that Cosette later claimed constituted a MAC.
The FDA letter was held not to constitute a MAC in its own right. But (presumably) if the FDA letter had constituted a MAC, Cosette would have been able later to terminate the SID.
One could argue therefore that Cosette had equivocated on whether to continue with the SID by reserving its position on the FDA letter. Can a party be said to unequivocally affirm a contract while equivocating on whether the party will later terminate it?
But Black J’s approach was to apply the doctrine of election to the grounds on which the termination right could be exercised, rather than to the competing rights (continue or terminate) as such.
This approach is demonstrated by the way his Honour expressed Cosette’s elections. For example, in relation to the amendment to the SID:
Cosette’s choice, with admitted knowledge of relevant matters, to amend the SID and affirm its continued operation was necessarily inconsistent with a choice to terminate and amounted, at least, to an election not to terminate the SID by reason of the matters then known to it.[4]
And in relation to the Deed Poll:
It also seems to me plain enough, from the chronology set out above, that the Cosette Parties had knowledge of the material facts necessary to give rise to an election, in respect of these matters at the time of entry into the Deed Poll.[5]
And in relation to Cosette’s participation in the first Court hearing:
[The Cosette Parties] chose to seek, and obtained, leave to appear …, which they may well not have obtained had they or their legal representatives then disclosed any reservation of a right to terminate the SID, at least by reason of any matter other than the FDA Letter, which had only just been received… Second, there would be a real inconsistency between appearing at the first Court hearing, apparently to support a scheme, and reserving an undisclosed right to terminate the SID. The Cosette Parties and their legal representatives taking the former position, without any further disclosure other than as to the FDA Letter, implied to the Court and to [Mayne’s] shareholders that they were not taking the latter position. That inconsistency can only be resolved by treating that conduct as an election to affirm the SID.[6]
There can be no election unless there are competing rights to choose between – here, a right to terminate the SID or continue with it. And awareness of the circumstances giving rise to the competing rights is necessary for a party to be regarded as electing between those rights. But the language above goes further. Black J concludes that Cosette made elections in respect of particular matters known to Cosette, even though His Honour held that the MAC was not triggered, so Cosette never had a choice between rights in the first place.
As a result, Cosette was held to have elected to affirm the SID and thereby lost its right to terminate it on any ground other than the FDA letter. (And it was held separately that the FDA letter did not constitute a MAC.)
Implications
Black J’s decision should perhaps be read as saying that if he was wrong that the MAC was not triggered (that is, it was triggered), Cosette forwent its right to terminate by electing to affirm the SID. His Honour did not put it like that though:
I have found that, although Cosette has established that aspects of [Mayne’s] Q3 FY25 Sales Performance constituted an adverse change, the impact of that change of [Mayne’s] Maintainable EBITDA fell short of the impact required to give rise to an MMAC. That declaration also cannot be made, second, because I have found that the Cosette Parties are bound by an election not to terminate the SID, made by their entry into the amended SID and the Deed Poll and their conduct at the first Court hearing.[7]
This could be just untidiness, a product of the remarkable speed with which the (very lengthy) decision was prepared. It was handed down five days after the end of the hearing and had to traverse a very involved factual matrix, considerable lay and expert evidence, and legal argument on a range of issues.
As a matter of commercial practicalities, if there is a low bar for what constitutes the ‘unequivocal act’ amounting to an affirmation of a contract – including steps to continue the broader transaction the subject of an agreement, maintaining the status quo pending a decision about whether to terminate –the ramifications of the affirmation should not be excessively consequential. It should not be that where (as here) a contract provides that an accumulation of adverse events can give rise to a termination right if they together reach a certain materiality threshold, but they have not reached that threshold at a point when the party takes a step that amounts to an affirmation of the contract, the party loses any right to accumulate those events with later events which may together reach the materiality threshold.
However, the authorities are clear that the converse applies. That is, if a party is sufficiently aware of circumstances that do entitle the party to terminate the contract – i.e. the party is actually aware, or at least has knowledge of circumstances from which ‘a clear if not a necessary inference’ can be drawn that the contractual right to terminate is enlivened – and takes steps which are consistent only with a choice to continue with the contract, the party forgoes its right to terminate.[8]
This raises obvious issues for a party who is aware of circumstances that may entitle the party to terminate, but the party is not clear whether they definitely do. It may be that the party cannot confidently say precisely when its right to terminate arises.
Black J’s very detailed judgment on whether the combination of circumstances impacting Mayne gave rise to a MAC shows how complex and time consuming it can be to assess with certainty the impact of a combination of circumstances. This includes the difficulty of quantifying the likely financial impact of events as distinct from other factors present at the same time – particularly for a bidder with less familiarity about a target’s business than the target itself, and limited access to information. Cosette was found to have elected to affirm the SID based on its knowledge of adverse developments in Mayne’s sales at various points in time, even though the degree of deterioration was difficult to quantify, and it was difficult to determine the extent to which the deterioration was attributable to causes that fell within the scope of the MAC, or was attributable to causes carved out from the MAC.
More generally: what constitutes affirming a contract?
Black J’s judgment illustrates that agreeing to amend a contract is an affirmation of the contract. And in a scheme of arrangement, appearing at the first Court hearing and lodging an affidavit in support of the scheme is an affirmation of the relevant SID.
Mason J in the High Court has said that an affirmation of a contract can occur if a party ‘exercises rights under the contract’.[9] In that case, the relevant affirmation was a vendor of property receiving payment of interest, instalments of a purchase price and rates.
Another example, a previous decision by Black J,[10] concerned a claim that a shareholder under a shareholders’ deed had elected to affirm the deed by voting in favour of a reconstruction of the company’s shares subsequent to a breach by another shareholder of a pre-emptive rights clause, so the shareholder was claimed to have lost its right to enforce the breach by requiring a compulsory sale. (It was held that the shareholder did not have sufficient knowledge of the breach at the time it voted in favour of the reconstruction, so no election was made out on the facts.)
In Mayne, Cosette submitted that:[11]
…a party to a contract is not taken to have affirmed the contract only because it recognised the existence of the contract, exercised rights under the contract, or otherwise acted on the basis that the contract remains on foot. There is no overriding principle that an act done under the contract will always communicate the decision to affirm; that would be contrary to the true nature of election; it may simply be the taking of action consistent with the contract while the position is explored. [emphasis added]
Black J said in response:[12]
I accept that submission, as a matter of principle and authority, but it plainly does not exclude the prospect that a waiver or election can take place by a choice to take one rather than another course, although a party would prefer to leave its options open, since the contrary view would denude principles of election of operative effect. [emphasis added]
It is not clear what Black J meant by accepting the Cosette submission. His Honour would not have agreed that exercising rights under a contract does not affirm the contract, because that would be contrary to High Court authority. It could be just an acknowledgement that not every exercise of rights under a contract amounts to an affirmation. But that leaves unclear what exercise of rights under a contract amounts to an affirmation and what does not.
Would boilerplate language help?
Cosette sought to rely on boilerplate clauses in the SID to the effect that conditions precedent and other rights may only be waived in writing, and a delay in exercising a right does not operate as a waiver of the right.
Black J rejected Cosette’s argument, holding that clauses about waiver did not apply to questions of election. He also cited an English case that emphasised that whether a person elects to abandon a right is a question of fact, and doubted (without deciding) whether parties could contract around that.[13] His Honour concluded:[14]
The inconsistency between terminating the SID for breach and continuing it in an amended form and reaffirming its effect is so stark that Cosette waived the requirements for writing at the same time that it waived the asserted breaches of the SID arising from the facts then known to it.
This falls short of binding authority that parties cannot contractually limit what they agree will constitute an election. However, taken together, they suggest that future courts may be reluctant to give effect to such an agreement.
The upshot
The Mayne decision suggests that, in practice, a party may be required to maintain a running list of complaints in case they may (alone or potentially in combination with other matters that may yet arise) give rise to a MAC or other right to terminate, so as to be in a position to raise them with the other party and reserve its rights if and when the party proposes to take an action that could constitute affirmation of the contract.
Mayne indicates that it would not be enough for a party merely to expressly reserve a right to terminate, should one exist. Rather, the party would need to articulate the specific bases on which it considers the right may arise; along the lines of what Cosette did with the FDA letter.
Communicating a list of complaints obviously runs the risk of undermining the goodwill and co-operation which is usually necessary to reach completion of an M&A transaction. It may be positively counterproductive if the party is seeking a concession from the other party, such as an extension to the completion date under a sale agreement.
Cosette’s appeal
Cosette has given notice of an intention to commence appeal proceedings on or before 15 January 2026. It is not clear whether Cosette will proceed with the appeal if FIRB approval is denied.
[1] In the matter of Mayne Pharma Group Limited [2025] NSWSC 1204 (Black J) (Mayne) at [465].
[2] Mayne at [218].
[3] Mayne at [507].
[4] Mayne at [482], emphasis added.
[5] Mayne at [485], emphasis added.
[6] Mayne at [506], emphasis added.
[7] Mayne at [509]. Also to note, Black J earlier said (at [489]) that he had not reached a concluded view on whether entry into the deed poll constituted an election.
[8] See Mayne at [459] to [466] and the cases cited, including Sargent v ASL Developments Ltd [1974] HCA 40, Elder’s Trustee and Executor Co Ltd v Commonwealth Homes and Investment Co Ltd [1941] HCA 31, Khoury v Government Insurance Office (NSW) [1984] HCA 55, Wiltrading (WA) Pty Ltd v Lumley General Insurance Ltd (2005) 30 WAR 290 and Allianz Australia Insurance Limited v Delor Vue Apartments CTS 39788 [2022] HCA 38.
[9] See Mayne at [461], quoting from Sargent v ASL Developments Ltd [1974] HCA 40 at [34].
[10] Re Computer Room Solutions Pty Ltd [2021] NSWSC 845, cited in Mayne at [463].
[11] Mayne at [475].
[12] Mayne at [476].
[13] Mayne at [478]-[482], citing Tele2 International Card Company SA v Post Office Ltd [2009] EWCA Civ 9 per Aiken LJ at [55]-[56].
[14] Mayne at [480].