American Apparel Inc. (APP) founder Dov Charney, by building up a bigger stake in the company he founded 16 years ago, is gearing up to take his fight for control of the clothing retailer directly to shareholders.
Charney, ousted as the retailer’s chief executive officer last month, bought 27.4 million shares on June 27, boosting his stake in Los Angeles-based American Apparel to 74.6 million shares, according to regulatory filings. The purchase was funded by a loan Charney got from Standard General LP last week.
The increased stake may help Charney in his bid to install a slate of directors who could give him back the CEO job. After the company blocked his attempt to take over the board through a special meeting, Charney is now resorting to a tactic that would allow him to add his handpicked directors if he can win approval from holders of more than half of the shares.
“Charney is not going to back down easy, so there’s going to be a lot more twists and turns,” said Damien Park, a managing partner at Hedge Fund Solutions LLC in Philadelphia, which researches and consults on activist investing. “This thing is going to be a roller coaster.”
American Apparel fell 9.2 percent to 82 cents at 1:29 p.m. in New York. The shares gained 41 percent from June 18, when the board suspended Charney, through yesterday.
In response to Charney’s attempts to regain control, the board last week adopted a one-year takeover defense plan, a so-called poison pill, that would dilute the shares if Charney adds 1 percent more to his current stake in the company. Charney’s most recent share purchases didn’t trigger the plan because they preceded its adoption.
If Charney’s consent solicitation is approved by the U.S. Securities and Exchange Commission, shareholders would have as long as 60 days to mail in their votes on the plan.
American Apparel suspended Charney with the intention to fire him for cause 30 days later after an investigation into his conduct found misbehavior including retaliation and misuse of corporate funds, according to people familiar with the probe. The findings came after several tumultuous years of leadership under Charney that included sexual harassment lawsuits, mounting losses and repeated cash crunches.
The board is using FTI Consulting Inc. to intensify its investigation of Charney, according to a person familiar with the situation who asked not to be named because the matter is private.
Charney and an American Apparel spokesman declined to comment. Nicole Madison, a spokeswoman for FTI, didn’t immediately respond to requests for comment.
Directors also are trying to negotiate a settlement with Lion Capital LLP, a creditor to the chain, that would prevent a chain reaction of defaults that would dry up the company’s access to capital.
Lion had a stipulation in its loan agreement with American Apparel that said a change in CEO could trigger a default and allow it to demand payment. Lion, which has loaned the retailer money in the past, isn’t granting a waiver and is asking to be paid, according to a person familiar with the situation. Shona Prendergast, a spokeswoman for Lion Capital, has declined to comment.
That decision threatens to trigger a default on a $50 million credit line with Capital One Financial Corp., under which $30 million is drawn, because of cross-default provisions in the agreements. A default also means American Apparel would lose access to $20 million available under that pact.
Capital One is holding its own talks with the company’s management and working to get Lion back on board with granting a waiver, according to one of the people.
The retailer’s current saga is the most recent in a succession of ups and downs since it started trading publicly in 2007. It rapidly opened stores in the middle of last decade when it became a hip place to shop for basics like T-shirts, leading to a 41 percent gain in revenue in 2008. By 2009, the chain faced what would become one of several cash shortfalls.
The chain has survived those by privately selling shares to Charney and other investors, convincing lenders to amend credit agreements to avoid breaching covenants and more recently by ramping up borrowing.
The company found some solid ground in the first half of last year with sales increasing 6.4 percent to $300.3 million. Then a malfunctioning distribution center stalled a turnaround, and the company had to raise capital again, this time by selling stock to the public.
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