Bloomberg News

American Apparel Investor Not Planning to Support Charney

June 22, 2014

American Apparel Founder Dov Charney

Dov Charney, founder of American Apparel Inc. Photographer: Keith Bedford/Bloomberg

American Apparel Inc. (APP:US) founder Dov Charney may have lost a key potential ally in his fight to get the chief executive officer job back.

American Apparel’s largest outside shareholder, the Swiss investment firm FiveT Capital AG, doesn’t currently plan to support Charney after the controversial executive was ousted last week. Johannes Minho Roth, who runs FiveT, had previously called Charney a “visionary” and said he was surprised by the firing because the CEO was doing a good job turning around the Los Angeles-based company.

“At this point, I don’t think we will support Dov,” said Roth, who spoke with Charney and American Apparel Co-Chairman David Danziger about the matter. “We’re not going to support him in this proxy fight -- if there will be one.”

While Roth said a final decision may hinge on additional information coming to light, the move makes it harder for Charney to build a coalition of investors to oppose his termination. FiveT owns about 13 percent of the shares, second only to Charney’s 27 percent stake. Charney’s lawyer sent a letter to the board’s counsel last week saying his abrupt ouster was illegal and violated his contract. The letter called for his reinstatement as chairman and CEO and demanded a meeting to resolve the matter by today.

American Apparel, a seller of T-shirts and other casualwear, had said on June 18 that it was terminating Charney for cause after an investigation into unspecified misconduct. Roth said when he spoke with Danziger he wasn’t given a reason for the firing.

Secret Reason

“David said, ‘You would understand if you know what it was, but I’m not allowed to tell you,’” said Roth, whose firm is based in Zurich. Since he lacks the full story, Roth said he could change his mind if he learns more about what happened.

Charney, 45, didn’t immediately respond to a message seeking comment.

When the struggling clothing maker announced Charney’s firing, it warned that the move could force a default because a management change may violate its terms with lenders. Since then, it’s been in discussions about obtaining a waiver, as well as talking to banks and private-equity firms about getting money to pay off the loans, a person with knowledge of the company (APP:US) said.

Uphill Battle

The board’s effort to gain more allies -- or at least ward off enemies -- now hinges on Lion Capital, the British investment firm co-founded by Lyndon Lea. Lion has the right to two board seats under its lender agreement and may be sympathetic to Charney, according to the person, who asked not to be identified because the discussions are private. While adding two directors would give the private-equity firm more sway, it still would lack the majority needed to bring Charney back, the person said.

“Charney may fight long and hard, but he has little chance of winning,” said Erik Gordon, a professor at University of Michigan’s Ross School of Business. “It is the board’s right to hire and fire CEOs.”

The board has been working to persuade investors and creditors that it did the right thing by firing Charney, who has faced sexual-harassment lawsuits over the years and drawn controversy for provocative ads. The company investigated Charney’s actions this year and found a history of misconduct that ranged from retaliation to misallocation of corporate funds, the person said. That included buying plane tickets for family members and using corporate housing for friends and himself that wasn’t related to company business, according to the person.

Losing Money

American Apparel also has racked up about $270 million in net losses (APP:US) since the beginning of 2010 and seen its stock price plunge below $1. The shares (APP:US) have lost about two-thirds of their value over the past year, leaving the retailer with a market valuation of $120.7 million.

In 2011, a woman sued Charney, saying that he sexually assaulted her after she came to his house for a job interview. That same year, a second woman filed a complaint saying he retaliated against her for a previous lawsuit by leaking nude pictures of her and sexually explicit e-mails to the New York Post and the Los Angeles Times. At the time, a California judge agreed with the company that the claims should be resolved through arbitration rather than a trial.

Misuse of money and corporate assets alone wouldn’t have been enough to dismiss Charney, the person said. When added to other findings such as retaliation, the board had no choice, according to the person. The directors enlisted Jones Day to manage the investigation, the person said.

Arbitrated Cases

While several female employees have accused Charney of sexual harassment, all the cases were either dismissed or went to arbitration.

Charney’s lawyer, Patricia Glaser, said in her letter to the board’s counsel that the charges leveled against him were “completely baseless” and didn’t damage the company’s finances or reputation.

Allan Mayer, co-chairman for the chain, confirmed that it had received the letter and declined to comment further on it.

According to the letter, Charney was given an ultimatum: If he stepped down as CEO and chairman while also giving up his voting rights as the largest shareholder, the company would hire him as consultant at a multimillion-dollar salary for at least four years. If not, he would be publicly fired. Charney was even shown two drafts of the press release -- “termination” and “resignation” versions -- to intimidate him, Glaser said. When Charney didn’t agree, the termination release went out.

Waiting Period

When the board sent the statement on the night of June 18, it said it was first suspending Charney and then would fire him after a contractual 30-day waiting period. Charney also was ousted as chairman and replaced in that role by Mayer and Danziger. Of the seven-member board -- including Charney -- five voted to terminate him, the person familiar with the matter said. One board member was absent due to illness, the person said. John Luttrell, the retail chain’s chief financial officer, was named temporary CEO.

The move set off a ticking clock with creditors, who can use Charney’s firing to accelerate payment of money due. That could lead the company to become bankrupt or insolvent, according to a filing last week. While American Apparel is seeking a waiver to avoid that fate, the negotiations may not prove fruitful, the company said at the time.

“There can be no assurance that the requested relief will be granted on terms acceptable to us or at all,” the company said in the filing.

Raising Funds

Still, American Apparel only owes Lion Capital about $10 million, and that shouldn’t be difficult to raise, Roth said. Since Lion is the lender with the change-of-management clause in its agreement, paying them off would lower the immediate risk, he said. FiveT could even help them raise the money if requested, Roth said.

“If they need the money, I would consider helping them out,” he said.

Lion’s Lea didn’t immediately respond to a request for comment left outside of normal business hours.

Charney lost some clout after American Apparel’s stock offerings -- undertaken to stave off a cash crunch -- reduced his stake from about 45 percent at the end of 2012 to 27 percent.

Under Charney’s leadership, American Apparel had earned a reputation as a hip clothing seller and champion for domestic manufacturing. In more recent years, it suffered from expanding too quickly. The missteps included a new distribution center that didn’t work properly and disrupted the supply chain.

Severing ties with Charney gives the company a chance to start over, even if the current controversy further tarnishes its image, said Poonam Goyal, a New York-based senior retail analyst with Bloomberg Industries.

“They have to remain laser-focused on the marketing and the product,” she said. “That’s what going to help them recover from all of this.”

To contact the reporters on this story: Matt Townsend in New York at mtownsend9@bloomberg.net; Nick Turner in New York at nturner7@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net


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Companies Mentioned

  • APP
    (American Apparel Inc)
    • $0.94 USD
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