* Western Digital drops effort to stop the chip sale to Bain group
* JV agreements to be extended to 2027 or later (Adds details of the settlement and background)
TOKYO, Dec 13 (Reuters) - Toshiba Corp and its chip business partner Western Digital Corp agreed to settle a long-running dispute over the embattled Japanese conglomerate's plans to sell its chip unit, the companies said in a statement, removing a key obstacle to the deal.
Toshiba agreed in late September to sell Toshiba Memory, the world's second-biggest producer of NAND chips, to a consortium led by Bain Capital LP for $18 billion to cover billions of dollars in liabilities arising from Toshiba's now bankrupt U.S. nuclear power unit Westinghouse.
With data storage key to most next-generation technologies, demand for NAND chips has boomed, and Western Digital, Toshiba's chip business partner and jilted suitor in the auction, had threatened to block any deal without its consent.
The settlement calls for Western Digital to drop arbitration claims seeking to stop the sale to the Bain consortium in exchange for Toshiba allowing the U.S. partner to invest in a new production line starting next year for advanced memory chips.
As part of the settlement, Toshiba and Western Digital will extend existing agreements for their chip joint ventures in Yokkaichi, central Japan, until 2027 or later. The current agreements are set to start expiring from 2021.
The ownership ratio for the joint ventures remains 50.1 percent for Toshiba and 49.9 percent for Western Digital.
They also plan to enter into a definitive agreement "in due course" under which Western Digital will participate in a new chip plant that Toshiba will start building next year in northern Japan, the statement said.
South Korean chipmaker SK Hynix Inc's participation in the Bain consortium has infuriated Western Digital and a key sticking point in recent weeks had been how to ensure it would be blocked from accessing proprietary information that belonged to the chip unit, sources have previously said.
The joint statement said both companies "have agreed on mutual protections for their assets and confidential information in connection with the sale of Toshiba Memory, and on collaborating to ensure the future success of Toshiba Memory as a public company following an eventual IPO."
"We wanted to make sure that our interests in the JV were sufficiently protected and we had the right kind of protections and the right kind of access," Western Digital Chief Executive Steve Milligan told a conference call.
Toshiba gained the upper hand in negotiations with Western Digital after securing a $5.4 billion cash injection from overseas funds that will allow it to bolster its balance sheet before the end of March and avoid a delisting.
The chip unit sale may, however, face more complications.
Argyle Street Management Ltd, a Hong Kong-based hedge fund with $1.2 billion under management, sent a letter to Toshiba's board on Monday urging the company to scrap the deal, which the fund claims significantly undervalues the chip unit.
Argyle is inviting the 30-plus overseas investors who participated in Toshiba's new share issue to team up in opposition to the deal although it remains to be seen just how much traction it will gain.
The sale also needs to clear regulatory reviews, but they are not expected to scuttle the deal. (Reporting by Makiko Yamazaki and Ritsuko Ando in Tokyo and Rushil Dutta in Bengaluru; Editing by Cynthia Osterman and Stephen Coates)