Two weeks after his humiliating ouster from American Apparel Inc., Dov Charney’s seemingly doomed quest to take back the clothing company he founded has gained surprising traction.
In an unorthodox move, the scandal-plagued Los Angeles chief executive borrowed nearly $20 million to boost his ownership stake to 43% from 27%. That’s given Charney leverage as he furiously lobbies other shareholders to support his comeback.
“The momentum is on Dov’s side,” said Randy Katz, a partner at law firm BakerHostetler in Costa Mesa who is following the corporate battle closely. “He has a better-than-even shot of getting where he wants to be.”
Charney still faces an uphill battle — and maybe a court fight — as he tries to expand the company’s board with new members who would reinstall him at the helm. But he has gotten further than seemed possible just a few days ago, observers say.
Relatively few deposed CEOs, especially those booted by their own hand-picked directors, succeed in reclaiming their jobs. Most don’t try. But Charney has stressed an emotional allegiance to the company he founded roughly 20 years ago.
“This is Dov’s revenge,” said Lloyd Greif, chief executive of investment banking firm Greif & Co. “You have a very angry, jilted CEO who is letting the company feel his full wrath. He was basically told they were divorcing him, and he is saying, ‘Au contraire, it ain’t so.’”
Charney, in a government filing Tuesday, unveiled a plan to seize control of the company. The board had refused his request for a special meeting to consider expanding the board from seven to 15 members. So Charney now plans to seek written consent from other shareholders.
Charney would need to gather written support from shareholders owning a total of more than 7% of the company’s stock to amass a controlling bloc of above 50%.
That tactic, legal experts said, is allowed under Delaware law, where the company is incorporated. However, working in tandem with other shareholders could trigger American Apparel’s newly adopted poison pill defense, announced Saturday. The plan would allow existing shareholders to buy new stock in the company — effectively diluting Charney’s stake.
Charney declined to comment Tuesday on the latest developments. Allan Mayer, the company’s co-chairman, also declined to comment.
The corporate drama comes as the company warned the Securities and Exchange Commission that it faces a possible bankruptcy because firing Charney could trigger defaults on nearly $40 million in outstanding loans. It also faces an interest payment of $13.5 million to bondholders in October.
The company has retained an investment firm to find capital, and analysts have speculated that the company needs a cash infusion.
“The shenanigans and circus atmosphere this is becoming does not lend itself to high-confidence lending,” said Craig Johnson, president of consulting firm Customer Growth Partners. “The back-and-forth and the distraction really makes it difficult for anybody other than a highly speculative lender to get involved.”
Charney, 45, founded a T-shirt company in his dorm room at Tufts University and built it into a business that employs 10,000 people and operates about 260 stores worldwide. American Apparel’s seven-story downtown Los Angeles factory, housed in a former Southern Pacific Railway freight depot, is the largest garment-making facility in the U.S. and employs about 4,500 workers.
Charney has indicated he will use everything at his disposal to win back his company.
The dueling sides have engaged in a series of moves and countermoves over the last two weeks after the board terminated Charney as chairman and suspended him as chief executive, pending an “ongoing investigation into alleged misconduct.”
The allegations include misusing company funds and apartments and allowing a subordinate to publish naked photos of a former employee who was suing Charney. His contract blocks his termination as CEO for 30 days.
His lawyer, Patricia Glaser, has denied the allegations and last week filed an arbitration petition alleging wrongful termination, breach of contract and retaliation.
Charney’s stock-buying spree — accomplished under a lending arrangement with New York investment firm Standard General — apparently came before American Apparel announced its shareholder rights plan Saturday.
Over the weekend, a special committee of the board tweaked American Apparel’s bylaws, according to a government filing. The amended bylaws prohibit executives or shareholders from calling special meetings, roughly double the time required to nominate directors and submit stockholder proposals at annual meetings and emphasize that board directors can be removed “for cause.”
Regardless of the changes to the company bylaws, analysts said, Charney’s huge block of shares may force the board to sit down with him. Alternately, securities experts say, both sides may slug it out in court as Charney tries to add new directors to the board.
“He’s going to have one hell of a battle,” said Jerry Reisman, a corporate law expert who has worked with the retail industry. “He is going to be challenged at every step he takes by the board. The court will determine whose actions are the best actions.”
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