American Apparel Board Votes to Replace Charney

Beginning a process that will most likely end in a protracted fight and possible litigation, the board of directors of Top 40 supplier American Apparel (asi/35297) voted in June to oust Dov Charney, the company’s CEO. The board said the action “grew out of an ongoing investigation into alleged misconduct,” later revealing that it found Charney to have misused company funds.

Following the company’s annual meeting, the American Apparel board voted unanimously to replace Charney as chairman immediately and “notified him of its intent to terminate his employment as president and CEO for cause,” according to a statement. Charney’s attorney, Patricia Glaser, says her client was illegally fired by American Apparel’s board of directors – in part, she claims, because the termination violated the Age Discrimination in Employment Act.

The law, according to Glaser, requires American Apparel to provide 21 days to consider any proposed severance agreement. The board told Charney, who earned $1.07 million in total compensation from the company in 2013, around midday on June 18 that he had until day’s end to accept a $4 million severance package that would have had him serve as a creative consultant for several years – or be terminated. He did not resign.

“By presenting Mr. Charney with this absurd and unreasonable demand, the company acted in a manner that was not merely unconscionable but illegal,” Glaser wrote in a letter to American Apparel’s counsel. Speaking to the Los Angeles Times, American Apparel co-chairman Allan Mayer said the Top 40 supplier was on firm legal ground in its firing of Charney. “It’s what we would expect from Dov’s attorney in a situation like this,” said Mayer, “but we continue to believe firmly that we did the right thing, for the right reasons, in the right way.”

Charney, though, is making moves to work his way back into American Apparel’s operations. Following his ouster, at which point he owned 27% of the company’s shares, Charney struck a deal with New York investment firm and hedge fund company Standard General to acquire an additional 16% of the company’s shares. As part of that deal, Charney agreed to give Standard General complete control of his shares in the company, giving the investment firm 43% control of American Apparel.

At press time, the hedge fund had parlayed that control into a deal with American Apparel to provide it additional financial backing (necessary because of a looming loan payment) in exchange for the right to nominate up to five new members of the company’s board.

Still unclear is what role, if any, Charney will play at the company going forward. Standard General is reportedly conducting an investigation into his actions and how he ran American Apparel. Depending on the result of that investigation, Charney could reportedly return to the company in some capacity, though not necessarily as CEO, industry analysts say. But he definitely won’t be back as a director of the company, as his agreement with Standard General stipulates that he can’t seek a seat on the board.

Meanwhile, in the wake of Charney’s firing, American Apparel named John Luttrell, its current CFO, as interim CEO. The company also installed Mayer and David Danziger as co-chairmen of the board, and officially suspended Charney for 30 days from the company under the terms of his employment. Mayer said the decision came after the board launched an investigation earlier this year into Charney’s actions when “new information came to light.”

“This is not easy, but we felt the need to do what we did for the sake of the company,” said Mayer, who has been a member of the American Apparel board since the company went public in 2007. “Our decision to do what we did was not the result of any problems with the company’s operations. Dov Charney created American Apparel, but the company has grown much larger than any one individual and we are confident that its greatest days are still ahead.”

American Apparel ranks as the 14th-largest supplier in the industry, and reported its promotional market revenues for last year as $99.2 million. Charney has been a member of the Counselor Power 50 since the list’s inception in 2006. The company’s stock (NYSE: APP) price increased by more than 30% in the three weeks following the news of Charney’s ouster.