American Apparel deal keeps Dov Charney on as consultant - for now

After weeks of turmoil following the ouster of Chief Executive Dov Charney, American Apparel Inc. has staved off potential financial ruin by reaching a deal with its largest shareholders that will bring a welcome infusion of cash and also keep its manufacturing in the U.S.

The Los Angeles retailer and Standard General, the New York hedge fund that controls a nearly 44% stake in the company, have reached a deal that will shake up American Apparel’s board and bring in a cash infusion of up to $25 million, the two companies said Wednesday.

Charney, who tethered his shares to Standard General in a cooperative buying arrangement about two weeks ago, has agreed to the new deal, American Apparel and Standard General said in a news release.

He will remain as a strategic consultant with the company until an investigation into alleged misconduct is concluded; based on the findings, a committee of board members will determine whether he can serve as “CEO or an officer or employee of American Apparel.”

As part of the deal, Standard General is upholding American Apparel’s commitment to making its products in America. The investment firm will not support shifting even a percentage of U.S. manufacturing to low-cost countries overseas, according to a person familiar with the negotiations.

“We’re strongly committed to keeping the business in Los Angeles,” David Glazek, a partner at Standard General, told The Times. “The fact that the clothing is made in Los Angeles is a key part of the brand identity.”

Glazek said the American Apparel brand is still strong, and so are sales. But turmoil over the years has distracted the company from focusing on its core business.

“The series of crises, which in isolation looks one-off, sucked up both liquidity and management time,” Glazek said. “If you get a moderate period of stability, the business is going to do quite well.”

The deal includes up to $25 million from Standard General that will enable American Apparel to pay off a nearly $10-million loan from Lion Capital. Lion formally demanded repayment Monday, citing an unusual provision in its lending agreement that allows the loan to be called in early if Charney stops working as CEO.

The retailer’s board will be revamped, with only co-Chairmen Allan Mayer and David Danziger remaining, the companies said. The five new board members will include three members designated by Standard General and another two chosen jointly by the investment firm and the retailer’s current board.

The agreement also includes protections against Standard General amassing more control – it prohibits the investment firm or Charney from buying additional shares and limits their vote to no more than one-third of the company’s shares on any issue put to a stockholder vote. The remaining shares would be voted in proportion with how other shareholders cast their ballots.

New board members could include people with retail experience, turnaround know-how or strong financial backgrounds who could help negotiate with creditors in the future, the person said. The new board could be seated in a couple of weeks. Charney won’t serve on the reconstituted board.

Standard General plans to help the company improve operations, including investing more in e-commerce and expanding stores both domestically and internationally.

The board voted out Charney as chairman and CEO on June 18, pending an investigation into alleged misconduct. The vote immediately suspended him at CEO, but a 30-day wait was required before he could be officially terminated.

Charney reached out to Standard General after his ouster to buy shares in the company that booted him. Standard General was already interested in the retailer, the person said, and struck a deal with Charney that came with several strings attached: The investment firm would take control of Charney’s shares, and could not guarantee Charney’s return to the company.

Standard General bought 27.4 million shares in American Apparel about two weeks ago. Under its agreement with Charney, Standard General bought the shares and then lent Charney nearly $20 million to buy the stock from Standard General, with the loan carrying a 10% annual interest rate.

Then last week, Standard General said in a letter to investors that it was in discussions with American Apparel to shore up its management and finances, and “restore the company to health.”

It remains to be seen whether Charney will play a part in the future of American Apparel, which he founded more than two decades ago.

In the letter last week, Standard General said Charney had agreed to refrain from seeking any leadership role in American Apparel until the retailer’s investigation into his conduct has concluded. The investment firm said its deal with Charney is not “an endorsement of him.”

American Apparel is looking into allegations against Charney, including misuse of company funds and apartments and allowing the posting online of nude photos of a former employee who was suing him. An independent committee will be formed consisting of new and old board members to continue the investigation.

“He will serve no role if he is deemed unfit,” Standard General said in its letter.

Follow Shan Li on Twitter @ShanLi