M&A Diligence: “what time is close of business”?
The recent High Court case of Lehman Brothers International (Europe) (in admin) v ExxonMobil Financial Services BV  EWHC 2699 (Comm) confirms what us corporate lawyers have… Read more
The recent High Court case of Lehman Brothers International (Europe) (in admin) v ExxonMobil Financial Services BV  EWHC 2699 (Comm) confirms what us corporate lawyers have known for a long time: that “close of business” means a time later than 5pm.
The case concerned a portfolio of securities which Lehman Brothers had sold to ExxonMobil on 9 September 2008, having agreed to buy it back on 16 September 2008. The day before the agreed buy-back date, Lehman Brothers collapsed and ExxonMobil served a notice of default. The agreement between Lehman Brothers and ExxonMobil provided that ExxonMobil had the right to serve a default valuation notice if it did so by close of business on the fifth day after the day the default occurred. The phrase “close of business” was not defined in the securities agreement.
ExxonMobil served its default valuation notice by fax on the fifth day after default, which was received by Lehman Brothers at 6.02pm London time. Of the many arguments submitted by Lehman Brothers as to why the notice was invalid, one centred around ExxonMobil being out of time, as the notice should have been received before “close of business”, which Lehman Brothers took to mean 5.00pm. ExxonMobil took a more literal approach and argued that in the modern world, commercial banks close later, at around 7.00pm, so “close of business” should refer to the typical time a commercial bank closed.
The court agreed with ExxonMobil:
“[Lehman Brothers] submits that if a reasonable person was asked at what time close of business occurred in London, 5.00pm (at the latest) is the obvious answer, and that accordingly, ‘5.00pm is the candidate to beat’. I do not accept that either. In the context of financial business of the kind at issue… a reasonable person might be surprised to hear that business closes at 5pm. In fact, it does not, and I do not understand this to be in dispute.”
The courts will therefore look at the nature of the agreement and the respective businesses of the parties to determine what typically would be “close of business”, as the phrase has no legal meaning. If it is important for the agreement to specify precise time periods, the parties should ensure a specific time and day are agreed and contained in the final version of the contract. Given the global nature of many businesses, it would also to be sensible to refer to the relevant time-zone.