Canon will now own the unit that was set up in 2004 to develop a new type of thin panels that can be used in TVssuch as Samsung Electronics and Matsushita Electric Industrial.
The move is aimed at appeasing Texas-based Nano-Proprietary, which filed a lawsuit claiming that its 1999 agreement to license technology to Canon did not extend to Toshiba. Toshiba has a 50 percent stake in the joint venture, called SED Ltd.
But it may also pose a bigger risk for the future of Canon, the world's top maker of copiers and digital cameras, which has been hoping the new display business will become a major profit driver amid expected cooling demand and price declines in its existing core products.
Nano-Proprietary said the ownership change does not resolve the pending litigation.
"We have terminated Canon's license as a result of breach of contract. Moreover, our complaint against Canon includes other counts, including fraud unrelated to the ownership of SED," Nano-Proprietary CEO Tom Bijou said in a statement. "We are, however, willing to enter into a new license agreement with Canon on reasonable terms."
Theare said to have brighter pictures and consume less energy than currently available flat TVs such as those using , but analysts doubt SED televisions will be .
"We currently have limited expectation that SEDs can catch up to LCD and plasma TVs," Ryohei Katsura, an analyst at Mizuho Securities, wrote in a report earlier this month.
In addition, the plan to build a $1.49 billion factory this year at a site owned by Toshiba in Himeji, western Japan, to mass produce the panels is under review, Canon said.
Tokyo-based Canon and Toshiba delayed the launch of SED TVs last March to the October-December quarter of 2007 to improve cost competitiveness and combat steep price erosion.
Without a new plan for mass production, Canon may have to "reconsider growth drivers to replace SED," Katsura said.
Canon, which is set to report a seventh year of record earnings when it announces fourth-quarter results later this month, has been posting double-digit profit margins thanks to strong sales of copiers and printers and rigorous cost-cutting.
Katsura said the market may view a decision to scrap the new factory plan more favorably than a decision to invest without taking cost-effectiveness into consideration.
Canon said it will manufacture the displays on a smaller scale at its own plant for the launch in Japan, which is still scheduled for the fourth quarter.
Even without the stake in the display venture, Toshiba said it will buy some displays from Canon and sell SED televisions under the Toshiba brand, while Canon will separately market its own TVs.
Some analysts said the change in plan may be positive for Canon shareholders.
"Investors in Canon have always wanted the company to use its ample cash flow in some form or another, and they are going to like the move as effective investment in a new business," said Keishin Mo, an analyst at Shinko Securities.
The companies declined to provide financial details of the transaction, which is scheduled for completion on January 29.
"The decision was reached following discussions between Canon and Toshiba based on the assumption of prolonged litigation pending against Canon in the United States with respect to SED," the companies said in a statement.
Last month,a 55-inch SED television at the , one of the biggest industry events, in Las Vegas this week.