A special committee of the Los Angeles retailer's board made the move after Charney stated his "intent to acquire control or influence over the company" in a Friday filing with the
"The rights plan is designed to limit the ability of any person or group, including Dov Charney, to seize control of the company without appropriately compensating all American Apparel shareholders," the statement said. "It is intended to provide the board of directors and stockholders with time to make informed judgments."
Charney, who owns 27% of the retailer's stock, entered into an agreement with New York investment firm Standard General to boost his stake in the company, according to the filing. If Standard General acquires at least 10% of American Apparel's outstanding shares, it will lend Charney the funds to buy the stock. That could boost Charney's share to at least 37%.
Shares of American Apparel climbed nearly 30% to 97 cents on Friday, with some reports pegging the surge to purchases by Standard General.
Designed to dilute a potential buyer's holdings, the retailer's "poison pill" plan gives shareholders the right to buy one ten-thousandth of a share of preferred stock at an exercise price of $2.75.
Further rights kick in if an investor attempts to acquire a big chunk of American Apparel stock, the company said. Any person or group that owns 15% or more of American Apparel's common stock will be dubbed an "acquiring person." Any person or group that already owns at least a 15% stake in the company's common stock will be deemed an acquiring person if they buy an additional 1% of stock.
If that happens, existing stockholders will be able to buy additional shares of the company's common stock for $2.75 a share. In the event of a takeover, stockholders will also be entitled to receive common stock in the purchasing company at a value that is equal to twice the exercise price of the right (at this point, $2.75).
Aside from its difficulties with Charney, American Apparel is struggling to overcome many financial hurdles.
The retailer has lost nearly $270 million in the last four years and is more than $200 million in debt. The company has warned that firing Charney could trigger defaults on nearly $40 million in loans and force it into bankruptcy.
Allan Mayer, the retailer's co-chairman, said that the company had sufficient capital to pay off the loan if Lion asks to be repaid right away.
All the turmoil has raised speculation among analysts that the company is ripe for a takeover.
Although interim Chief Executive John Luttrell has emphatically denied any interest in selling the retailer, the company made several references to a sale in its Saturday statement.
The company said the stockholder rights plan has "no impact on a takeover for the entire company acceptable to the holders of a majority of the company's shares."
"The rights plan is not intended to prevent or deter takeover bids that offer fair treatment and value to all stockholders," American Apparel said. "Rather, the rights plan is intended to protect stockholders from any threat of creeping control."