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Litigation Risk Stalls Sell-off of Toshiba’s Semiconductor Business
Real Reason
Litigation Risk Stalls Sell-off of Toshiba’s Semiconductor Business
  • By Michael Herh
  • August 22, 2017, 02:15
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The reason for Toshiba’s delay of a formal contract with the Korea-US-Japan Alliance is reportedly due to a litigation risk.
The reason for Toshiba’s delay of a formal contract with the Korea-US-Japan Alliance is reportedly due to a litigation risk.

 

Toshiba said that it was litigation risk that delayed a formal contract with the Korea-US-Japan Alliance, which includes SK Hynix, although the alliance was selected as the preferred bidder for the sell-off of Toshiba Memory.

According to the Mainichi Shimbun Newspaper of Japan on August 21, Toshiba selected the public-private fund Innovation Network Corporation of Japan, US Private Fund Bain Capital and the Development Bank of Japan as the preferred bidders on June 21 to complete the sale-off by March next year.

At that time, SK Hynix decided to participate in the bid in the form of financing them and the preferred bidder began to be called the Korea-US-Alliance Alliance. Toshiba set its goal of selling off the memory unit by a general meeting of shareholders on June 28.

Nonetheless, the reason why the signing of the deal has been delayed is that Western Digital or WD which is in partnership with Toshiba has been strongly opposed to the sell-off. The situation has become litigation risk.

Toshiba originally collaborated with SanDisk (SD). In 2000, Toshiba invested 50.1% while SD the remaining, and established a company that develops and produces semiconductor memories together in Yokkaichi, Mie Prefecture of Japan.

But in May 2016, things got complicated when WD bought SD. Although WD intended to continue working with Toshiba, Toshiba which wanted huge profit from the sell-off, showed a move to exclude WD from the preferred bidder.

“It is a violation of the contract to sell Toshiba Memory without our consent,” WD said in May this year. WD took the case to the International Arbitration Tribunal that judges international disputes to ask for the suspension of the sell-off. The trial is expected to begin this fall.

It usually takes one to two years to reach a conclusion, so the case may not be resolved by the end of March of next year. Therefore, the Korea-US-Japan Alliance is calling for the resolution of the conflict making the sell-off delayed, saying, "We can hardly acquire Toshiba Memory with litigation risk."

In particular, "Since the Japanese government made an investment in the Innovation Network Corporation of Japan, the Innovation Network Corporation of Japan is responsible for explaining about investment,” the newspaper said. “The Innovation Network Corporation of Japan cannot thoughtlessly invest in an issue (the acquisition of Toshiba Memory) that may be scrapped.”

Toshiba is currently in negotiations with WD and Taiwan’s Honghui Precision Industry (Foxconn) as well as with the Korea-US-Japan Alliance. Although the Mainichi reported that the preferred bidder might change, it is said that its possibility is very slim.

However, as WD produces semiconductors as Toshiba Memory does, the sell-off of Toshiba Memory to WD is more likely to fail to pass anti-trust laws in many other countries compared to other groups.

The bad blood between Toshiba and WD has deepened as there was another legal struggle between the two companies. Foxconn has financial power. But, if and when Toshiba Memory is sold off to Foxconn after Sharp, the Japanese Ministry of Economy, Trade and Industry will demur about the sell-off due to concern about a leak of Japan's high technologies.

If WD does not demand the management right to Toshiba Memory by participating in the form of giving a loan, it will not be time-consuming and will be easy for each country related to the triangular alliance to pass the takeover. However, WD wants to secure the management right. so, in any case, WD will finally hold the key to the deal.

Inside Toshiba, a voice is being raised that Toshiba should be prudent about selling off Toshiba Memory as Toshiba Memory accounted for more than 90% of Toshiba’s profits in the second quarter of this year. But banks with dealings with Toshiba do not agree with the cancellation of the sale, so it is highly unlikely that the sale plan will be scrapped. Moreover, as Toshiba had 366,000 shareholders as of the end of March, many interests conflict with one another.

Meanwhile, Jiji Press reported that major banks doing business with Toshiba were asking Toshiba to conclude a contract within August this year because negotiations over the sell-off of Toshiba Memory were at a snail’s pace. This is because even if a contract is signed, the deal has to pass examinations by antitrust laws.

“Examinations by antitrust laws of countries may take more than half a year to complete. Toshiba has to conclude a contract within August in order to avoid the excess of debts,” Toshiba explained.   

Major Banks financing Toshiba, such as Mitsui Sumitomo Bank and Mizuho Bank, clarified its position that they will provide financial support to Toshiba on condition that Toshiba Memory would pay off its accumulated debts, calling for the sell-off of Toshiba Memory within this month.