Dov Charney may have won the battle over American Apparel, but the spoils of war may not be his, in the end.
After three weeks of uncertainty and financial maneuverings, the fate of clothing manufacturer American Apparel may finally be decided. The hedge fund Standard General LP, which backed American Apparel’s embattled former CEO Dov Charney in his takeover bid of that company, has reached a deal with the company’s board. A preliminary agreement gives Standard General control of the clothing manufacturers’ board of directors, the NY Post reports.
The board will continue to have seven members. Co-chairmen Allan Mayer and David Danziger will stay, but the other five board members, including Charney himself, will all be replaced.
Of the now five open spots on the board, three will be filled by directors chosen by Standard General alone. The other two will go to people approved by both Standard General and American Apparel
The hedge fund on Monday agreed to help American Apparel pay back a $10 million loan as part of the deal. The firm may even pay it off by the end of this week.
The battle for control of the company began after Charney was fired for cause as its CEO on June 18. The termination resulted from a scandal centered on nude pictures of a company employee that were posted online, as well as allegations that Charney misused corporate funds to benefit his family and friends.
(See several articles published by JBN on this prolonged battle)
The deal comes after Standard General and American Apparel entered into negotiations over the weekend, to decide on the latter’s leadership. The clothing company insisted that it would not take Charney back if he is found guilty of sexual misconduct.
An investigation into Dov Charney’s alleged offenses when he served as American Apparel’s CEO is currently being conducted by the outside firm FTI Consulting. The results of that probe will be crucial to determining Charney’s future with the company. But even if he is cleared of any wrongdoing, it is not a certainty that Charney will return as CEO.
Together with Charney, Standard General had amassed a 43% stake in the company, or 74.6 million out of its 173 million outstanding shares. The agreement, however, does not guarantee that Mr. Charney will return to lead American Apparel. In fact, there is no word as to what, if any, role he will play.
Charney filed official papers with the SEC within days of his firing, announcing his intention to attempt a hostile takeover. At the time, he only owned 27% of the company’s shares.
While the takeover bid led to a 20% increase in American Apparel’s stock, it faced a liquidity crisis after the British firm Lion Capital demanded immediate repayment of a $10 million loan, after Charney had been fired. That loan was contingent on Charney’s leading the company, and Lion Capital exercised its right to call it in when he was terminated.
While it may be hard to believe that a company with $650 million in revenues would be in danger of bankruptcy over a $10 million debt, American Apparel is having liquidity problems. It was not be so easy for American Apparel to borrow the needed funds due to its management turmoil.
Lion had offered the company until July 4th to reach an agreement with it on payment, but no arrangement has of yet been announced.
Standard General was founded by its chief investment officer, Soo Kim, with three other partners. The fund was launched with seed money from Dan Stern’s Reservoir Capital. It manages roughly $1 billion in assets, including borrowed money.