Oh my Tosh: Western Digital takes Toshiba to arbitration

Breach of contract bustup could block sale of Tosh's chip unit

Updated WDC is taking Toshiba to an arbitration court process, potentially blocking Toshiba's sale of its Memory Business, which owns Toshiba's share in a flash foundry joint venture with WDC.

The JV has an arbitration clause in its contract terms and conditions which gives WDC the right to agree or disagree any sale of Toshiba's JV stake. Toshiba has previously denied this, with both parties issuing legal threats to each other over the matter.

In detail, WDC said several of its acquired SanDisk subsidiaries, which operate the JV, have filed a Request for Arbitration with the International Court of Arbitration of the International Chamber of Commerce (ICC) related to three NAND flash-memory joint ventures.

The arbitration demand seeks among other things an order requiring Toshiba to unwind the transfer to Toshiba Memory, and injunctive relief preventing Toshiba from further breaching the Flash JV agreements by transferring its Flash JV interests, or any interest in an affiliate that holds its Flash JV interests, without SanDisk's consent. Per the provisions of the joint venture agreements, the arbitration will take place in San Francisco, California.

Stifel analyst and MD Aaron Rakers pointed out: "WD notes that Toshiba materially breached the JV agreements on April 1, 2017 by transferring the JV interests to a newly created affiliate, Toshiba Memory, which it is now in the process of selling. This differs from WD acquiring SanDisk in that SanDisk was purchased in whole – no change in the JV interests."

That could turn out to be a crucial point. Rakers quoted this Appendix A extract from the JV agreement:

If the Management Representatives cannot resolve such dispute in accordance with the terms of the Master Agreement, then such dispute will be settled by binding arbitration in San Francisco, California. The dispute shall be heard by a panel of three arbitrators pursuant to the rules of the International Chamber of Commerce. The awards of such arbitration shall be final and binding upon the parties thereto.

WDC CEO Steve Milligan stated: "We continue to be actively engaged in discussions with Toshiba's stakeholders to ensure that they are fully aware of our joint venture rights and of our desire to work with Toshiba to achieve a favorable outcome for all parties. We firmly believe that we provide Toshiba with the optimal solution to address its challenges, and that we are the best partner to advance its legacy of technology innovation in Japan."

Obviously Toshiba disputes these legal rights. As part of its Memory Business sale it moved its share of the JV into a separate legal entity, Toshiba Memory. WDC's statement says; "SanDisk and Toshiba agreed to protect their interests in the joint ventures by prohibiting transfers without the consent of the other party. Toshiba's attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk's consent."

Seeking relief through mandatory arbitration was not our first choice in trying to resolve this matter. However, all of our other efforts to achieve a resolution to date have been unsuccessful, and so we believe legal action is now a necessary next step.

According to Bloomberg the arbitration process is San Francisco-based, with a three-person group overseeing it – one each from WDC and Toshiba plus a chairperson chosen jointly by Tosh and WDC or the ICC, which oversees the arbitration.

Arbitration talks could take 12-24 months, with obstacles en route requiring resolution in the courts.

This ICC International Court of Arbitration procedure could delay Toshiba's Memory Business sale beyond a date when it has to achieve certain business reporting conditions in Japan. Previously it has said its overall situation is threatened by unquantified losses from its nuclear power staion-building business in the US and that the whole group could fail.

According to Reuters, Toshiba has issued an unaudited earnings release revealing it ended the year with a 950bn yen ($8.4bn) net loss and negative shareholder equity worth 540bn yen if it fails to get cash selling its Memory Business.

WDC has been invited to join a Japanese government-led consortium to buy Toshiba's Memory Business but refused as it believes it needs to buy Toshiba's JV share outright.

+Comment

Toshiba needs the cash from a sale by auction of its Memory Business to stay afloat and recover. WDC is not a leading bidder in the auction so far: it is held back by SanDisk acquisition debts, does not like some of the other bidders as potential JV partners, and is now pointing a legal gun at Toshiba's head.

If WDC succeeds in forcing Toshiba's hand via the arbitration court plan, Toshiba will have to reconsider its refinancing plans and may have to go to court itself. It previously threatened to lock out WDC employees from the JV's premises, in a letter on 4 May.

This dispute could easily get uglier still. ®

Update: Toshiba is planning to make good on its threats, according to Bloomberg, which is reporting that the firm is actually preparing to exclude WDC employees from the JV flash memory premises in Yokkaichi, central Japan, and block their online access as well.


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