(Bloomberg) -- Toshiba Corp. is moving to block Western Digital Corp. employees from the flash-memory venture they share, after a threat of legal action loomed over the increasingly bitter dispute over who gets to buy the Japanese company’s chip unit.

Western Digital invoked an arbitration clause in their business agreement, which could postpone a sale. Later on Monday, Toshiba will go forward with plans to shut out Western Digital’s workers from its flash memory facilities in Yokkaichi in central Japan as well as digital access to its networks, people familiar with the matter said.

The escalating standoff between the companies over the chip sale could imperil Toshiba’s plans to use cash from the divestment to plug a hole in its balance sheet from a massive loss in its nuclear power business. The U.S. disk drive maker fears the operations may fall into the hands of competitors, even though it probably doesn’t have the financial wherewithal to buy the unit itself. At the same time, Toshiba needs to sell the chips business soon to avoid posting negative shareholder equity for two straight years.

“Toshiba’s memory business is very appealing and has attracted a lot of potential buyers,” said Hideki Yasuda, an analyst at Ace Research Institute. “But Western Digital, just coming out of a major acquisition itself, simply can’t afford it, and must make the most out of its position as a joint venture partner to get to an outcome more favorable to itself.”

Earlier this month, Tokyo-based Toshiba said that Western Digital still hasn’t signed a revised contract after becoming its flash memory manufacturing partner through the acquisition of SanDisk Corp. last year -- and that it must comply by end of day Monday. It’s not clear how many Western Digital employees would be affected; SanDisk workers would continue to have access.

In preparation for the divestment, Tokyo-based Toshiba transferred ownership of the memory unit to a separate legal entity but didn’t get permission before doing so, according to Western Digital. The two should enter binding arbitration to resolve the dispute, Western Digital said.

“We firmly believe that we provide Toshiba with the optimal solution to address its challenges and that we are the best partner to advance its legacy of technology innovation in Japan,” Western Digital Chief Executive Officer Steve Milligan said in a statement. “Toshiba’s attempt to spin out its joint venture interests into an affiliate and then sell that affiliate is explicitly prohibited without SanDisk’s consent.”

Toshiba said it hasn’t received any notice of arbitration, and rejected claims that the process is in breach of the joint venture agreement. Toshiba said it will continue to handle the sale properly and that Western Digital has “no grounds” to interfere with the process. Western Digital executives have described Toshiba’s situation as “desperate.”

“We have to reassure prospective buyers that Western Digital has no grounds to prevent the process from going forward,” Toshiba President Satoshi Tsunakawa said at a briefing in Tokyo on Monday. Tsunakawa said the decision on whether to shut off Western Digital’s access will be made during U.S. hours.

Underscoring the need for Toshiba to secure a sale, the company announced preliminary results for the year that ended in March showing a net loss of 950 billion yen ($8.4 billion). Shareholder equity was negative 540 billion yen for the year, and will be another 540 billion yen again in the current fiscal year unless a divestment happens, it said. Toshiba is selling assets to contend with writedowns in its Westinghouse nuclear business, stemming from excessive costs and construction delays. Westinghouse is now in Chapter 11 bankruptcy protection.

Separately, utility owner Southern Co. has agreed to take the lead from Toshiba’s U.S. nuclear unit on building two reactors at its plant in Georgia as soon as next month. Toshiba’s stock closed 3.4 percent higher in Tokyo on Monday.

Toshiba previously told Western Digital not to interfere in the sale plans and that it may take legal action as well as barring the U.S. company’s employees from its facilities.

Arbitration will take place in San Francisco, Western Digital said. Each side will propose one member of the three-person panel. The third, who will serve as chairman, will be chosen by either the two other members or the International Chamber of Commerce, which will oversee the arbitration. The process can take as long as a year. Any move that undermines arbitration, such as a sale of the unit before the panel reaches a decision, could allow the issue to go to court.

The type of chip produced by the joint venture, known as flash memory, is enjoying a bumper year. Micron Technology Inc., Samsung Electronics Co. and SK Hynix Inc. have all reported strong demand for the product as the industry moves away from magnetic disks in computer storage. Toshiba’s sale has garnered significant interest, with preliminary bids as high as $26 billion from Hon Hai Precision Industry Co., Bloomberg reported last month. Other bidders include SK Hynix and Broadcom Ltd.

Mark Long, chief financial officer of Western Digital, said this month that “each of the rumored bidders is problematic.” The company has talked to all of the prospective buyers to look for a solution.

Western Digital has held discussions with Innovation Network Corp. of Japan and Development Bank of Japan Inc. about options for making a bid of its own. It hopes to secure exclusivity with Toshiba and has argued that a sale to a third party is in breach of their joint-venture agreement -- a claim that the Japanese side disputes.