Toshiba got the cash for its medical biz before the deal closed

Toshiba (TYO:6502) managed to book the $5.95 billion sale of its medical business to Canon (NYSE:CAJ) before the deal actually closed, by setting up a holding company with just $300 in assets to skirt Japanese anti-trust regulations.

In March, Toshiba granted Canon exclusive negotiating rights to buy Toshiba Medical Systems after a hotly contested auction. Toshiba badly needed the ¥665.5 billion sale to shore up its business in the face of mounting restructuring costs after a $1.3 billion accounting scandal.

In a rush to ensure that it could book the cash for its fiscal 2015 year ending March 31, Toshiba created MS Holding, which has just 3 directors and $300 in capital. The maneuver dodged Japan’s anti-monopoly law requiring Fair Trade Commission approval for deals involving companies with more than ¥20 billion ($179 million) in annual sales.

Fujifilm Holdings (TSE:4901), which Toshiba jilted for Canon in the race to be the preferred bidder for Toshiba Medical Systems, questioned Toshiba in March on the asset transfer and the timing of the deal. Fujifilm said this week that if Toshiba’s move with MS Holding goes through it “would make a mockery of the law,” saying “it is a method that companies like ours, with open, fair and clear policies, could never consider.”

Toshiba also managed to finagle the payment from Canon before Japanese anti-trust regulators approve the deal; according to a March 30 filing, Canon paid for the rights to acquire Toshiba Medical but that tit can only exercise those rights after the deal has been approved by Japan’s FTC.

A Canon spokesman acknowledged that the deal’s structure is a necessary evil.

“We don’t think this scheme is the best in all circumstances, but it was important for this deal to be done quickly and in an ensured manner,” he said, declining to confirm any agreement between MS Holding and Canon.

Experts said that Toshiba’s tactics, although questionable, are probably legal under Japanese rules.

The accounting “was not illegal because they found a legal loophole,” Kasumigaseki International Law Office partner Shinichiro Abe said. “In order to close this hole, there may be a need for the authority to set up a new rule in the future.”

“The scheme is slipping through a set of accounting rules regarding special-purpose vehicles,” according to CPA Yuji Hosono. “It’s compliant, but goes against the principle of accounting.”

Toshiba Medical Systems put up sales of $3.63 billion (¥405.6 billion) during fiscal 2015.

Toshiba also said today that it booked a $2.3 billion (¥260 billion) impairment charge for its U.S. nuclear unit Westinghouse, but still raised its earnings estimate for fiscal 2015, thanks to the profits from the Toshiba Medical sale. Losses are now pegged at -$4.2 billion (-¥470 billion), down from a prior forecast for losses of -$6.35 billion (-¥710 billion). Full results are slated to be released May 12.

The company is also negotiating the exit of CEO Masashi Muromachi, who was brought in last year to right the ship. Satoshi Tsunakawa, credited with boosting earnings at Toshiba Medical, is said to be a leading candidate.

Toshiba shares closed at ¥241.9, or about $2.16, less than half their worth before the accounting scandal surfaced last year.

($1 = 111.79 yen)

Material from Reuters was used in this report.

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