Dec 28 Toshiba Corp's claim that it is
owed $2.15 billion by Chicago Bridge & Iron Co NV (CB&I)
hinges on how an independent auditor will calculate the net
working capital of a U.S. nuclear power plant construction
business that CB&I sold to Toshiba's Westinghouse unit last
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The following are the main issues at stake.
WHAT IS NET WORKING CAPITAL?
Net working capital is a measure of the financial strength
of a business, defined as its current assets minus its current
When a company sells a business to another company, the sale
agreement often includes a target figure for net working capital
to ensure that the financial position of the business does not
change materially from the time the deal is signed to when it
WHY IS IT IMPORTANT IN THIS CASE?
The two companies agreed that CB&I would not be paid any
money when the deal closed, and instead would receive earnouts
down the line. How much CB&I stands to be paid by Toshiba, or
owes to Toshiba, depends on how they calculate the net working
capital of CB&I Stone & Webster Inc, the nuclear power plant
construction unit that Westinghouse bought. What is more, CB&I
funneled close to $1 billion to CB&I Stone & Webster between the
end of June 2015 and the end of December 2015, when the deal
closed, and therefore sees the net working capital mechanism as
a way to be compensated for continuing to support the unit after
the deal signed.
The agreed target for the net working capital was $1.174
billion, so CB&I would be owed money by Toshiba if CB&I Stone &
Webster's net working capital was more than $1.174 billion at
the time the deal closed, while CB&I would owe money to
Westinghouse if the unit's net working capital amount was below
WHY IS THE CALCULATION IN DISPUTE?
CB&I has calculated the net working capital to be $1.6
billion, suggesting it is owed $428 million by Toshiba. The
Japanese company has calculated the amount to be minus $976.5
million, indicating it is owed $2.15 billion by CB&I.
The vastly different amounts stem from four changes that
Westinghouse made to CB&I's calculations. Westinghouse reduced
by 30 percent an outstanding receivable on the unit's balance
sheet, it adjusted it to reflect the cost of design changes in
its projects, it raised the estimates of the cost to complete
the projects by 30 percent, and added back a $432 million
liability that CB&I had deducted.
Westinghouse argued that CB&I's methodology did not adhere
sufficiently to Generally Accepted Accounting Principles (GAAP),
while CB&I maintained that it has stuck to the accounting
methodology it used before and Westinghouse previously accepted.
HOW WILL THE DISPUTE BE RESOLVED?
The contract for the sale of the business calls for an
independent auditor to resolve accounting disagreements over the
value of the net working capital, and this is expected to happen
CB&I has sued to prevent Westinghouse's interpretation of
the liabilities to be included in the net working capital
calculations from being put before the independent auditor.
Earlier this month, the Delaware Court of Chancery dismissed
that lawsuit, and an appeal by CB&I is pending.
ARE THERE ANY SIMILAR CASES?
There have been two previous cases in Delaware where net
working capital calculations have been legally challenged; OSI
Systems Inc v. Instrumentarium Corp in 2006, and Alliant
Techsystems Inc. v. MidOcean Bushnell Holdings L.P. in 2015.
In the case of OSI, the judge found that the GAAP compliance
of net working capital calculations should be the subject of
legal, rather than accounting, arbitration.
In the case of Alliant, the judge found that it was for the
independent auditor to decide on the admissibility of the
accounting calculations, because it found the language of the
contract to be more prescriptive.
In the case of Toshiba, the judge decided the language of
the contract was more similar to the Alliant case, and so
dismissed CB&I's lawsuit.
HOW IS THIS RELATED TO THE WRITEDOWN TOSHIBA ANNOUNCED?
The nuclear power plant construction unit's liabilities
affect not just the net working capital calculations, but also
the valuation of the unit.
Toshiba initially estimated the goodwill resulting from the
transaction at around $87 million, but said on Tuesday it could
be hit by a writedown in the billions of dollars.
Toshiba executives have said it could take until February to
pinpoint the exact impact.
Sources: Court filings
(Reporting by Greg Roumeliotis in New York; Editing by Lisa