American Apparel Inc., the retailer whose shares have dropped 52 percent in the past year, adopted a one-year shareholder rights plan to keep ousted Chief Executive Officer Dov Charney from taking control of the company.
A special committee of the board made the decision after a filing to the U.S. Securities and Exchange Commission by Charney, “in which he expressed an intent to acquire control or influence over the company” and “reports of rapid accumulations of the company’s outstanding common stock,” American Apparel said in a statement today.
Charney, who already owned 27.2 percent of the troubled retailer, yesterday entered into a loan agreement with Standard General LP to help increase his stake as he contests his firing. American Apparel said last week it replaced Charney after it investigated his actions. The Los Angeles-based company found a history of misconduct that ranged from sexual harassment and retaliation to misallocation of corporate funds, a person familiar with the matter has said.
“This plan is an important tool to ensure that all American Apparel stockholders are treated fairly,” the company said today. “It is intended to provide the board of directors and stockholders with time to make informed judgments.”
The rights will be “attached to all shares of common stock,” and each right entitles the holder to purchase one ten-thousandth of a share of preferred stock at an exercise price of $2.75, according to the statement.
The rights may separate “upon the occurrence of certain events,” the company said. The plan allows investors to accumulate as much as 15 percent of common stock and has no impact on a takeover proposal that is acceptable to a majority of investors, American Apparel said.
If a person or group already beneficially owns 15 percent or more of the common stock, the person won’t be deemed a so-called acquiring person unless an additional 1 percent of the company’s shares is purchased, American Apparel said.
Under the plan, Charney doesn’t beneficially own any of the American Apparel stock owned by Standard General “solely by reason of the letter agreement dated June 25,” the company said.
Standard General will loan Charney funds to buy at least 10 percent of outstanding shares, according to the SEC filing yesterday. The loan carries a five-year term and will use Charney’s stock as collateral.
“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 stockholders,” the company said.
The retail chain, which started out selling U.S.-made T-shirts and became a byword for hip fashion, has racked up about $270 million in net losses since the beginning of 2010. The company avoided a cash crunch this year by selling stock.
Lion Capital LLP, a creditor to the chain, won’t grant a waiver request from the retailer to keep its $10 million loan from going into default and is demanding full repayment, according to two people familiar with the matter.
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.
American Apparel shares jumped 30 percent to 97 cents at the close in New York yesterday, giving the retailer a market value of about $169.3 million, and slid 7.2 percent to 90 cents in extended trading.