Due to serious financial difficulties, Toshiba is trying to sell off their stake of their very successful flash memory business to keep the rest of the company afloat. Western Digital, as a result of their acquisition of SanDisk last year, owns half of the joint venture that Toshiba is selling their stake in. Western Digital would prefer to buy out Toshiba's share to strengthen their own position in the market, but they have struggled to keep up with the bidding as offers climb past ¥2T ($17.8B). The leading bidder has been a consortium with backing from the Japanese government and many major Japanese corporations through the Innovation Network Corporation of Japan and the Development Bank of Japan, as well as investments from Bain Capital Private Equity and rival memory manufacturer SK Hynix.

Western Digital has asserted that the terms of their joint ventures with Toshiba require SanDisk's approval before Toshiba can sell their stake, and Western Digital has not given their consent to any sale. This has not stopped Toshiba from continuing to negotiate a sale, so Western Digital has predictably taken legal action. In May Western Digital began arbitration proceedings through the ICC International Court of Arbitration. Toshiba made a partial concession by rolling back the spin-off of some of the memory business assets they were preparing to sell, but their overall plan did not change and Western Digital was not placated. Earlier this month, Western Digital filed for an injunction preventing Toshiba's sale until the arbitration was resolved. Western Digital's action was filed in the Superior Court of California for the County of San Francisco.

As the dispute developed, Western Digital and Toshiba continued normal day to day operations of their business, including announcements around Computex about their upcoming SSDs using their 64-layer BiCS3 3D NAND, and the announcement earlier this week of their development of 96-layer BiCS4 3D NAND. Toshiba was hoping to complete a deal with the winning bidder at a shareholder meeting yesterday. In the weeks leading up to that meeting, Toshiba had to issue several reminders of how desperate their financial state is: disclosing new legal actions against them by investors seeking damages pertaining to Toshiba's accounting scandals, announcing that the Tokyo and Nagoya stock exchanges are moving toward delisting Toshiba, and revising their outlook for fiscal year 2016 to reflect a negative shareholder equity of (¥581.6B). Meanwhile, Western Digital reiterated their objection to Toshiba selling the memory business to a third party and warned several third parties that they would view participation in the sale as tortious interference. Most recently, Western Digital also reportedly resubmitted its bid for Toshiba's memory business with an offer around ¥2 trillion, close to the amount offered by the consortium Toshiba had previously selected as the preferred bidder. Toshiba for their part has made no mention of Western Digital's offer.

In the aftermath of yesterday's shareholder meeting, Toshiba made several announcements. As expected, Toshiba was not able to finalize a sale of the Toshiba Memory Corporation subsidiary they have consolidated the memory-related assets under, but they are continuing to negotiate with the consortium. Toshiba announced plans for further investment in the joint venture's Fab 6 in Yokkaichi, Japan, and questioned whether SanDisk would jointly invest in the 3D NAND fab. Toshiba also announced that it has filed a lawsuit in the Tokyo District Court against Western Digital alleging unfair competition and seeking an injunction and damages. Toshiba claims that Western Digital is exaggerating their consent rights and also alleges that Western Digital has improperly obtained Toshiba trade secrets by transferring some employees from SanDisk to Western Digital whom have access to Toshiba confidential information through the joint ventures.

Western Digital has responded by denying Toshiba's allegations of improper handling of trade secrets, and claims that Toshiba has taken retaliatory action by cutting off some of Western Digital's employees' access to shared databases and facilities. Western Digital reaffirmed their intent to continue fully participating and investing in the joint ventures, and claimed to have not yet received the legal filings pertaining to Toshiba's lawsuit in Tokyo. Western Digital again claimed that the terms of their joint ventures requires that disputes be resolved through the arbitration process, making it clear they consider Toshiba's lawsuit improper.

The SanDisk request for an injunction in the California court is scheduled for a hearing on July 14. It appears that there will not be any quick resolution to this dispute unless Toshiba's money troubles force them to accept Western Digital's bid. The consortium that Toshiba is trying to sell to has not made any collective public statements, but we expect continued leaks about the state of their offer.

Source: Toshiba

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  • Strunf - Thursday, June 29, 2017 - link

    When you are facing economical problems the vultures will not take long to show up...
    I can't blame WD for trying to get the Toshiba share for lower than what others offer, they can always resell it afterwards and make a profit on it or keep it since the HDD part of WD is pretty much doomed.
    Reply
  • Hurr Durr - Thursday, June 29, 2017 - link

    >wd
    >vultures

    Funny word for the company that is actually invested in the partnership.
    Reply
  • Santoval - Thursday, June 29, 2017 - link

    Western Digital is obviously trying to bankrupt Toshiba so that they buy them out at a firesale price. Sneaky and cunning or "It's just business?" Reply
  • name99 - Thursday, June 29, 2017 - link

    Be careful in exactly what you are claiming.

    (a) No-one sane wants to buy Toshiba as a whole, given their massive potential nuclear liabilities. (Remains unclear if Westinghouse scammed Toshiba, or Toshiba was incapable of managing the Vogtle construction properly. Doesn't help that Toshiba has been engaging in massive accounting fraud for the past few years...)

    (b) Given all the above Toshiba is ALREADY bankrupt. WD isn't trying to do anything...
    The only issue is whether WD wants to pick up some small sub-unit (or two) of Toshiba --- no way in hell do the want the whole thing, along with all its lawsuits and liabilities...
    Reply
  • Penti - Thursday, June 29, 2017 - link

    The joint venture that is 49,9% owned by Western Digital is depending on the 50,1% owner to invest 50% of the money when it comes to expansions, refurbishing plants, buying equipment, R&D etc. Toshiba is contractually obligated to provide 50% of the cost for the venture, a new owner has to be prepared to do the same (and actually be able too) for it all to work out. Without that the plants that WD has spent billions on and own half of (it's the joint ventures that has developed the technology so Toshiba trying to say that they are stealing IP is retarded) will be worthless in a short amount if time. Toshiba can ruin everything for WD, WD can't really do the same for Toshiba. WD should be fine with other owners, but only owners that can continue to invest in the fabs. Reply
  • Chugworth - Thursday, June 29, 2017 - link

    It sounds to me like the terms of the joint venture give WD the power to deny any sell except the sell to themselves. That should make this case pretty simple. But since the business is sitting in Japan, who knows. Especially if the Japanese government is already mixed in with that consortium. Reply
  • kellyH - Thursday, June 29, 2017 - link

    Actually Western Digital said during their last earnings call that they did not have first right of refusal on the joint venture.
    What is probably in the contract is an assignment clause which says they have to sign a consent to have the contract terms assumed by a new buyer of Toshiba. If they don't sign the assignment, the contract dissolves.
    This is a big miss by the Western Digital legal team. They should have had a first right of refusal into the contract as soon as they bought SanDisk.
    I'm no attorney but I wouldn't be surprised if Toshiba prevails on the interference case.
    Reply
  • asmian - Thursday, June 29, 2017 - link

    "some employees from SanDisk to Western Digital whom have access to Toshiba confidential information"

    Please learn how/when to use "whom".
    Reply
  • Bullwinkle J Moose - Thursday, June 29, 2017 - link

    Hey WD,
    Just do to Toshiba what Toshiba is doing to you!

    We are not stealing your trade secrets....
    Those are OUR trade secrets!

    We will begin licensing those trade secrets to every Company who is now in the bidding process

    You will have access to the same technology for LESS than buying out Toshiba, AND, we will make more money than trying to bid for our own technology

    You vont 2 Playyyyyyyyy?
    Reply
  • masouth - Thursday, June 29, 2017 - link

    http://corporate.findlaw.com/contracts/operations/...

    If that is the actual operating agreement then it looks like WD may have a claim under 4.1 (a) (iv). I'm just an armchair lawyer but it looks pretty pertinent to the case since a sale of Toshiba Memory would seem to be a transaction in which "the Company is a party resulting in a Change of Control of the Company". I suppose it all depends on how legalese defines what constitutes as as being a party of.
    Reply

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