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Toys R Us Says HK Arbitration Could 'Upend' Reorganization

Toys R Us asked a Virginia bankruptcy judge on Monday to bar a Hong Kong retail company from moving ahead with its arbitration over the sale of the toy company's Asian business activities until its restructuring is done, saying the proceeding threatens to "upend" its plans to reorganize.
Toys R Us Inc., which began pursuing a wind-down of its 60-year-old U.S. business in March after a disappointing holiday season, alleged that the arbitration initiated by Fung Retailing Ltd. is nothing more than a ploy to depress bid prices for the toy company's most valuable remaining asset: a majority interest in Toys (Labuan) Holding Ltd., which comprises Toys R Us' business across Japan, China and Southeast Asia.
Fung, which currently holds a 15.13 percent interest in Toys (Labuan) Holding, has a right of first refusal that could then allow it to make a quick grab for a larger stake in the company on the cheap to the detriment of Toys R Us and its creditors, the toy company told the court. Toys (Labuan) Holding — referred to as the Asia joint venture in the brief — owns and operates more than 500 Toys “R” Us retail locations in Asia.
"The Fung arbitration is yet another mechanism to create chaos that ultimately will depress interest in the Asia JV and bid prices. Fung seeks findings in the Fung arbitration that will depress bids," according to Toys R Us.
Toys R Us said that it received multiple bids for more than $1 billion in an initial round of bidding for Toys (Labuan) Holding, but that subsequent rounds had yielded much lower bids due to uncertainty that Fung has sowed around its minority interest in the company.
The arbitration in question was initiated before the International Chamber of Commerce against Toys R Us affiliate TRU (UK) Asia Ltd., which is not included in the bankruptcy proceeding, and Toys (Labuan) Holdings. Among the issues raised in the arbitration is whether Fung can prevent any buyer from purchasing 100 percent of Toys (Labuan) Holding, meaning that buyers would have no choice but to have Fung as a minority partner, Toys R Us said.
But such issues would be better adjudicated by the bankruptcy court, according to the brief.
Toys R Us claims that Fung is exploiting the fact that Toys R Us affiliate Tru Taj LLC, which is included in the bankruptcy proceeding, does not own Toys R Us' interest in the Asia JV directly. That means that Fung is able to get around an automatic stay imposed as a result of the bankruptcy proceedings, according to the brief.
Toys R Us is asking the court to stay the prosecution of Fung's claims in the arbitration until the company's restructuring is completed.
Representatives for Toys R Us and for Fung could not immediately be reached for comment on Tuesday.
The New Jersey-based toy chain and owner of Babies R Us filed for Chapter 11 protection a year ago with more than $5 billion in funded debt, stemming in large part from money its owners borrowed in 2005 to fund a $6.6 billion leveraged buyout of the company and take it private.
Toys R Us is represented by Edward O. Sassower, Joshua A. Sussberg, James H.M. Sprayregen, Anup Sathy, Chad J. Husnick and Emily E. Geier of Kirkland & Ellis LLP and Michael A. Condyles, Peter J. Barrett and Jeremy S. Williams of Kutak Rock LLP.
Fung is represented in the arbitration by Martin Rogers and Jonathan Chang of Davis Polk & Wardwell. Counsel information for the bankruptcy proceeding was not available on Tuesday.
The case is In re: Toys R Us Inc. et al., case number 3:17-bk-34665, in the U.S. Bankruptcy Court for the Eastern District of Virginia.