According to local media Asahi, Sharp held a board meeting on Thursday to discuss the takeover bid by Foxconn, also known as Hon Hai Precision, and has decided to give the Taiwanese tech giant preferred negotiating rights, effectively choosing the rescue plan from the conglomerate over one offered by a Japanese state-fund.
Last year, it was reported that Foxconn had offered to purchase the Japanese technology company for 600 billion yen.
Asahi reports that Sharp will now finalise acquisition terms with Hon Hai going forward. It said that Sharp concluded Hon Hai's offer was more advantageous compared with that made by the Innovation Network Corp of Japan in funds, and has a higher chance of success.
The fund offered around half of what Foxconn offered, though precise terms are unknown.
Sharp was rescued last May in a 225 billion yen bailout from banks following a slump in its Liquid Crystal Display (LCD) business, its second in four years. Pressure from creditor banks due to the firm's slow progress in improving its earnings has also lead to job cuts and the selling of its head office building.
Hon Hai is one of Apple's largest contract makers for iPhones, but is considered behind in technology to South Korean conglomerates such as Samsung and LG, and Japan's Sony, Sharp, and Panasonic.
Sharp has a wide and crucial patent portfolio in display panels, especially in LCDs, which the Taiwanese giant wants. The Japanese government has expressed concerns that the deal with Foxconn will see its technology leaked abroad.
Hon Hai Chairman Terry Gou personally visited Osaka last Saturday to meet the top management of Sharp to convince them to take the deal.
"We want to help Sharp. Sharp has a 100-year history ... We want to keep it alive for maybe another hundred years. This is my goal," Gou told reporters at Kansai International Airport after visiting the headquarters of Sharp in Osaka for about two hours, according to the Japan Times.
Hon Hai has assured Sharp that it will not sell other businesses, besides the display division, to maintain employment of its current workforce.
Sharp is due to file its latest earnings report this afternoon.