Troubled American Apparel Inc. is bracing for a potential fight with its Montreal-born founder who was ousted from the head of the retailer this week. And that could include a prolonged proxy battle to gain control of the company.
The emerging rift follows the surprise decision by the company’s board of directors on Wednesday to remove the controversial and colourful Dov Charney as chairman and move to dismiss him within 30 days as chief executive officer. The board said its decision came as a result of an investigation into alleged misconduct. The probe is focusing on allegations Mr. Charney attempted to discredit women who had accused him of sexual harassment, and allegations he spent company money on personal matters, sources say.
One of Mr. Charney’s options is to try to gain more control of the company, of which he now holds about 27 per cent, and try to expand the board of directors so he can appoint his own candidates. But it would be a long and complex process, industry observers warn.
“It’s not something that is keeping us up nights,” Allan Mayer, the new Amercian Apparel co-chairman, said in an interview on Friday. “It’s far easier said than done … But I don’t expect him to just fold up his tent and walk away.”
The boardroom brawl comes as the casual-fashion retailer faces an uncertain future amid mounting financial strains and the latest leadership shakeup, which threatens to derail its turnaround efforts.
American Apparel has grappled for years with image problems over Mr. Charney’s racy reputation and numerous sexual harassment lawsuits filed against him. But he also was a creative force at the retailer – known for its made-in-America T-shirts and sexy marketing – and will be missed at the top levels, said Eric Beder, a retail analyst at Brean Capital in New York.
The Los Angeles-based retailer was starting to see signs of a turnaround this year and the latest moves are a distraction that could delay the revival work, Mr. Beder said in an interview Friday.
An attempt by Mr. Charney to expand the board could be difficult and require a court battle, he added.
When reached on Friday, the usually outspoken Mr. Charney refused to comment.
It can be difficult to shake up a board through a proxy battle, although a few recent cases have succeeded, including a high-profile fight at Canadian Pacific Railway Ltd. two years ago. The CP battle, spearheaded by hedge fund manager William Ackman, unseated the board and installed a new CEO.
Such an effort would be a calculated risk for Mr. Charney. A messy boardroom fight could hit the already struggling shares, which would weaken the value of his 27-per-cent stake. Mr. Beder said Mr. Charney could decide to sell his shares, which would inevitably put the company in play.
The company would be an attractive takeover target, Mr. Beder added, given its hip 19- to 29-year old urban customers and its no-sweatshop pledge. Potential buyers could include rival retailer Urban Outfitters Inc. or a manufacturer such as PVH Corp., whose brands include Calvin Klein and Tommy Hilfiger.
Mr. Mayer said the board is not seeking to sell American Apparel and it has not received any offers. “It has been speculated that one of the reasons we did this was to set up the company for sale. That’s completely and unequivicolly untrue.None of us have any intention of selling the company. None of us thought about that possibility in relation to this decision.”
He said investors appeared to back the board’s decision, by pushing the stock price up about 7 per cent to 68 cents (U.S.) Thursday on the New York Stock Exchange. However, the stock was little changed on Friday. The company’s shares have lost steam since it went public in late 2007 at $8 a share.
Sources said that on Wednesday, the company’s board was prepared to offer Mr. Charney two scenarios – one in which he stepped down amicably from the CEO role or another in which the board pushed him out if he didn’t co-operate. He chose the latter.
Board members had initially considered keeping Mr. Charney in a reduced role such as chief creative officer, but quickly dropped that option before it could be proposed, the sources added. A CEO search had found several high-profile candidates who said they wouldn’t take the job if Mr. Charney was still part of American Apparel, a source said.