Charney’s American Apparel Fate Hinges on New Directors

Dov Charney’s future at the company he founded 25 years ago will come down to three people, and one of them already voted to fire him.

Charney’s efforts to regain his job as American Apparel Inc.’s chief executive officer now depend squarely on a three-director committee of the chain’s reshaped board that will evaluate the findings of a probe into his conduct and vote on his fate.

That committee includes David Danziger, the current co-chairman, who approved of Charney’s ouster last month, and two directors who will be added in the next few weeks. One of those seats will be appointed by Standard General LP, the hedge fund that effectively became the chain’s largest shareholder in an investment partnership with Charney. The other will be mutually chosen by Standard General and the company.

The process was put in place this week, when Standard General reached a deal to provide as much as $25 million in capital to shore up the retailer’s finances and help it pay off a $10 million loan that the lender argued was in default. The deal also included replacing five directors while keeping Danziger and fellow co-chairman Allan Mayer. Standard General also agreed not to buy any more shares of the company until after its 2015 annual meeting.

Shares Gain

American Apparel rose 15 percent to $1.18 at the close in New York. The shares have gained more than 80 percent since Charney’s ouster last month.

The board suspended Charney on June 18 and planned to fire him 30 days later after directors discovered alleged misconduct, including misuse of funds and retaliating against a former employee who’d sued him for sexual harassment, a person familiar with the matter has said. The board then enlisted FTI Consulting Inc. to ramp up the investigation. A lawyer for Charney has said the board’s reasons for firing him are baseless.

Charney fought back by reaching an agreement with Standard General to borrow about $20 million to boost his stake to 43 percent from 27 percent. To get the deal done, Charney ceded control of his voting rights. Standard General next entered talks with American Apparel, advocating only that Charney get a fair review of his tenure, not automatic reinstatement.

In the next few weeks, Charney will be interviewed by the investigators and his legal team will have the right to see evidence, ask questions and respond a week before the committee decides, according to the agreement. The pact set a target of completing the investigation within 30 days. A decision on Charney is then expected to be made within 10 days.

FTI will get unrestricted access to the company’s employees, servers and equipment. That is noteworthy because Charney’s lawyer wrote the company asking it to hand over a server on company property that contained Charney’s personal photos without accessing any of them, a person familiar with the situation has said. Another person said the request stemmed from an agreement between Charney and the company in which he was given a server to safely store his photos, some of which were used in the chain’s marketing.

Before it's here, it's on the Bloomberg Terminal.