NEW YORK — The battle for control of clothing chain American Apparel is heating up.
Ousted American Apparel CEO Dov Charney has increased his stake in the clothing chain to nearly 43 percent as he fights to keep control of the company he founded in 1998. Charney was able to increase his stake through a partnership with financial firm Standard General, which is loaning him the money. But the board is scrambling to making its own moves to keep him out.
Legal experts say the dispute will likely end up in the courts at a tough time for the Los Angeles-based company, which has lost money since 2010. The company, which made its name with American-made goods and provocative advertising, is in a cash squeeze.
"This is going to move from the boardroom to the courtroom," said Jerry Reisman, a partner at Reisman, Peirez, Reisman Capobianco, a law firm based in New York. "Hopefully, it won't undermine the company. This company is very fragile."
In regulatory filings this week, Charney reports he now owns 74.6 million shares as of Friday. Previously, his stake was 27 percent.
Charney also sent a letter last week to the board seeking a meeting of stockholders on Sept. 25 for the purpose of expanding the board to 15 members, according to the filing. The company said in a regulatory filing late Monday that Charney's request is "invalid" and "improper" because he was suspended as CEO and relieved of all powers to act on the behalf of the company.
As a result, American Apparel doesn't intend to call a meeting and "intends to vigorously contest any action seeking to compel the company to do so."
American Apparel on Saturday adopted a shareholder rights plan, commonly called a "poison pill," a day after a bid from Charney to increase his control. A poison pill seeks to prevent hostile takeovers by diluting the value of a would-be acquirer's investment.
The documents, filed last Friday, showed that he had entered into a five-year loan agreement with investment firm Standard General LP to increase his stake. According to the terms, Standard General is loaning Charney money to buy at least 10 percent of American Apparel's outstanding shares. The loan will use Charney's stock as collateral.
The poison pill can be activated in two ways: if a person or group acquires 15 percent or more ownership of the company's stock or if a person or group who already owns 15 percent or more of the company's stock buys an additional 1 percent or more.
The plan stipulates the poison pill will be triggered if Charney make an additional move to buy shares by himself or with the help of others beyond his agreement with Standard General.
The Los Angeles-based retailer said early Saturday that the "poison pill" move, made by a special committee of its board of directors, is designed to limit the ability of any person or group, including Charney, "to seize control of the company without appropriately compensating all American Apparel stockholders."
With a 43 percent stake, Charney has to persuade holders of 7 percent of the company's shares before he can exert control on the company. But American Apparel is stalling the process for any shakeup in the board by changing the bylaws. In a regulatory filing Monday, it stipulated that the board has 10 days following a stockholder request after which the board has another 10 days to set a record date.
Reisman noted that American Apparel should look for a financial partner that could make an investment in exchange for newly issued shares.
Randy Katz, a partner at law firm BakerHostetler in Los Angeles, said he was puzzled about why Charney did not or could not acquire the additional 7 percent.
On June, 18, the American Apparel's board fired Charney as chairman and suspended him as president and CEO. His contract requires a 30-day period before he can be terminated. The board cited "alleged misconduct."
Charney has been the subject of several lawsuits alleging inappropriate sexual conduct with female employees. He has acknowledged having sexual relationships with workers, but said they were consensual.
Shares are down 9 cents to 81 cents in early afternoon trading. They've fallen 27 percent this year.