Joint Venture Dispute Between Toshiba and Western Digital Escalates, Toshiba Still Unable to Sell NAND Business

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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.

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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.

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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.

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