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Arbitration and auditing woes threaten Toshiba's turnaround

Legal battle will make it harder to meet March 2018 deadline for chip unit sale

President Satoshi Tsunakawa says Toshiba's chip unit sale will go ahead as planned.

TOKYO Toshiba's plan to unload its memory business has hit a potential roadblock with partner Western Digital's demand for arbitration, creating another delisting risk for the Japanese conglomerate in addition to continued friction with its auditor.

After massive losses on U.S. nuclear operations blew a hole in its finances, Toshiba spun off its cash-cow memory chip business in April and began working toward a sale. It has narrowed the field to five candidates: American private equity firm Kohlberg Kravis Roberts in partnership with the public-private Innovation Network Corp. of Japan, South Korea's SK Hynix, Broadcom of the U.S., Taiwan's Hon Hai Precision Industry and Western Digital.

But with new suitors expected to participate in the second bidding round, Toshiba is unlikely to pick a winner by June as originally planned.

Western Digital previously sent a letter demanding a halt to the sale and exclusive negotiating rights. Toshiba responded this month by threatening to block Western Digital's access to their jointly run chip fabrication facilities.

Western Digital on May 15 filed a request for arbitration with the International Chamber of Commerce's International Court of Arbitration. Though Toshiba President Satoshi Tsunakawa told reporters on May 15 that the auction will go on as planned, much will depend on the court, which could halt the sale.

The following day, Toshiba dropped its threat to shut its partner out of their shared facilities, but a resolution still seems a long way off.

NEED FOR SPEED Arbitration can be time-consuming. The International Court of Arbitration took four years to rule on one case involving Suzuki Motor and Volkswagen. But the Western Digital-Toshiba case "will probably go to emergency arbitration, in which Western Digital will seek temporary relief before official arbitration begins," an international arbitration expert said.

This process is used in cases where waiting for an official ruling could cause irreparable harm. Decisions are often reached in a matter of weeks.

Toshiba is likely considering countermeasures in case of an emergency ruling against the company. Western Digital is also showing no inclination to back down. It could take nearly a year for the court to reach a final decision, a semiconductor industry source said.

Toshiba does not have that kind of time. Its shares will be delisted automatically from the Tokyo Stock Exchange if shareholders' equity remains negative for two straight fiscal years. To avoid this, the company must sell the memory unit by the end of March 2018. The longer the row with Western Digital drags on, the tougher this will be.

All this comes on top of another potential threat to Toshiba's stock market listing -- its rocky relationship with auditor PricewaterhouseCoopers Aarata.

The conglomerate released results on May 15 for the fiscal year ended March 31 showing a net loss of 950 billion yen. This is the second-largest such loss ever for a Japanese nonfinancial company.

These are provisional numbers lacking the auditor's stamp of approval. But the securities report due at the end of June is a legally required disclosure that must come with an audit opinion.

The Japan Exchange Group is currently considering whether to maintain Toshiba's listing in light of problems with internal controls that landed the stock on a watch list. If PwC Aarata again declines to sign off on the report, or issues an adverse opinion, that could count against Toshiba.

The auditor is apparently pushing for a probe into the company's U.S. nuclear business to be reopened as a condition of performing the audit. Toshiba considers the matter closed.

Tsunakawa appeared less hostile to the idea on May 15 than at the previous earnings briefing, saying the company will cooperate in good faith with any necessary investigation. But other points of contention seem to remain.

Many in the audit industry expect Toshiba to stick with PwC Aarata to secure a clean opinion. Given the time it will likely take to sort things out, some see the securities report being delayed until around September.


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