May 16, 2017 8:00 am JST

Arbitration, auditing woes endanger Toshiba turnaround

Legal battle could delay memory unit sale beyond fiscal year-end deadline

Toshiba has threatened to restrict Western Digital's access to jointly run chip fabrication facilities in Yokkaichi, Mie Prefecture.

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.

Escalation continues

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 has added another wrinkle by taking more drastic measures in its dispute with Toshiba. The American hard-drive maker previously sent a letter demanding an end 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 CEO Steve Milligan's repeated visits to Japan to speak with Toshiba officials have failed to produce a compromise.

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

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. The arbitration court could take nearly a year 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 it will be for Toshiba to get back on its feet.

Still more delays

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

The fiscal 2016 results released Monday 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 Monday 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.

(Nikkei)

Toshiba Corp.

Japan

Market(Ticker): TKS(6502)
Sector:
Industry:
Consumer Durables
Electronics/Appliances
Market cap(USD): 11,383.19M
Shares: 4,237.60M

Suzuki Motor Corp.

Japan

Market(Ticker): TKS(7269)
Sector:
Industry:
Consumer Durables
Motor Vehicles
Market cap(USD): 26,384.17M
Shares: 491.01M

Japan Exchange Group, Inc.

Japan

Market(Ticker): TKS(8697)
Sector:
Industry:
Finance
Investment Banks/Brokers
Market cap(USD): 9,430.75M
Shares: 549.06M
Asia300

SK hynix, Inc.

South Korea

Market(Ticker): KRX(000660)
Sector:
Industry:
Electronic Technology
Semiconductors
Market cap(USD): 53,404.83M
Shares: 728.00M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 61,983.66M
Shares: 17,328.73M

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