WD-Toshiba memory sale requires 2-week notice to WD

Toshiba and Western Digital’s SanDisk subsidiary acted on a San Francisco judge’s suggestion today and agreed that Toshiba would give SanDisk two weeks’ notice before closing on a transfer or sale related to their NAND flash memory joint venture.

The WD-Toshiba agreement removes the need for the preliminary injunctive relief SanDisk had sought through the California court system, pending arbitration to determine if the planned WD-Toshiba memory business sale can take place without its consent. Toshiba and WD/SanDisk worked out the agreement prior to a scheduled hearing this afternoon in the San Francisco Superior Court.

Judge Harold Kahn approved the agreement and signed the order that requires Toshiba to publicly announce, within 24 hours, the signing of any agreement that “contemplates a closing” and send a copy to SanDisk by email. Toshiba also agreed to send a written notice by courier to WD’s chief legal officer at least two weeks before any closing occurs. Both agreements apply until 60 day after an arbitration panel is formed.

The agreement does not require Toshiba to recognize SanDisk’s claims of consent rights over the transfer of the Toshiba memory business. Toshiba said the agreement also preserved its objections to the California court having any jurisdiction in the WD-Toshiba dispute.

Tokyo-based Toshiba has been trying to sell its profitable memory business to cover losses with its struggling U.S.-based Westinghouse Electric nuclear power division. In June, the company selected a Japan-backed consortium as the preferred bidder.

But WD has claimed that no sale can take place without its consent. In May, WD filed a request for arbitration and injunctive relief with the International Court of Arbitration operated by the Paris-based International Chamber of Commerce.

Impending Toshiba memory business sale

Western Digital’s SanDisk subsidiary sought a preliminary injunction through the Superior Court of California after Toshiba announced plans to try to strike a mutually satisfactory agreement with the consortium by June 28, when its annual shareholder meeting took place. Toshiba said it hoped to close the transaction by March 2018.

SanDisk filed a claim with the California court to prevent the Toshiba memory business sale without its consent. SanDisk later sought an additional preliminary injunction “to stop retaliatory action” that it claimed Toshiba had taken to block San Disk’s affiliates from accessing Toshiba’s facilities, databases and networks that are critical to the operation of their NAND flash joint venture.

WD issued a release two weeks ago stating the California court had directed Toshiba not to transfer its interests in the three WD-Toshiba NAND flash joint ventures without “specified advance notice” to SanDisk to ensure the matter would be preserved for arbitration.

WD CEO Steve Milligan, via a prepared statement, claimed the court’s “directive” marked a victory for WD, SanDisk and their stakeholders. “Our entire goal was to preserve and protect our rights through the binding arbitration process, and that’s precisely what the Court has done,” Milligan said.

Yasuo Naruke, a senior executive vice president at Toshiba Corp., said via a prepared statement today that the “mutually acceptable understanding” is effective for a “very limited time” and “recognizes Toshiba’s right to negotiate and sign a definitive agreement for the sale of its memory business.” Toshiba claims it does not require SanDisk’s consent to transfer its memory business.

Naruke stated: “Further, as a practical matter, we don’t expect to close a deal during the period addressed in the order. Closing a transaction of this magnitude would require many months – well beyond the limited timeframe specified in the ruling. Toshiba therefore remains focused on preparing for the ICC (Chamber of Commerce) arbitration process, which we believe is the appropriate venue to address these issues. We look forward to successfully presenting Toshiba’s position to the tribunal, which we believe will be formed within the next month or so.”

Toshiba also noted in today’s statement that it “remains intent on soon entering into a definitive agreement for the sale of its memory business with one of the bidders.”

Toshiba’s board of directors disclosed last month that it selected a consortium, including Innovation Network Corporation of Japan (INCJ), a government-supported investment fund, Development Bank of Japan (DJB), and Bain Capital Private Equity LP. According to Western Digital, Korea-based chipmaker SK Hynix was also part of the consortium.

Prior to the Toshiba board’s announcement, potential bidders that surfaced through published reports included U.S.-based chipmaker Broadcom, Taiwan-based electronics maker Foxconn, SK Hynix and Western Digital.

During Western Digital’s earnings call Thursday night, Milligan said there had been constructive talks with Toshiba recently. Milligan said there was no “reasonable scenario” of disruption to the NAND supply his company receives from the joint venture.

“We expect to continue to secure wafer output, and from a manufacturing and operations perspective, the JV remains very healthy,” he said.

When asked if he had contingency plans if things did not work out, Milligan said “I don’t think that that’s a reasonable scenario to be considered. I would find that to be … just a highly unrealistic assumption to assume that.”

Milligan said he and WD CFO Mark Long travelled to Japan last week to talk to Toshiba. “Our discussions were constructive, and we will continue to work to seek a solution that is in the best interest of all parties,” he said. “Rest assured, this has the full attention of our team as we are committed to the continued success of the joint venture.”