By  on July 17, 2014

American Apparel Inc. has new headache.

On the eve of the company’s naming five new directors to its board — the confirmation is expected as early as next week, according to sources — a hedge fund has demanded the resignation of the firm’s two co-chairman, David Danziger and Allan Mayer.

Danziger and Mayer are the incumbent directors who were elected in June at the annual shareholders’ meeting, and are expected to continue with their terms in the reconstituted American Apparel board.

RELATED STORY: Hedge Fund Plans American Apparel Future Without Ex-CEO Dov Charney >>

The hedge fund is Bigger Capital Fund, which, along with Bachelier LLC and the Bigger Family, on Thursday made public a letter it sent to American Apparel’s board. That disclosure of more turmoil sent shares of American Apparel down 5.2 percent to $1.09 in trading on the New York Stock Exchange. In early after-market trading, shares fell another 0.9 percent to $1.08.

Mayer declined comment.

The new board to be formed, including Danziger and Mayer, is part of an agreement with Standard General inked last week that provides for Standard General to give the retailer up to $25 million in funding and give founder and former chief executive officer Dov Charney the temporary title of strategic consultant.

Charney is on leave as ceo pending an internal probe regarding certain matters from financial to sexual improprieties. He has filed for arbitration to resolve his employment dispute. John Luttrell, the company’s chief financial officer, holds the interim ceo post.

Bigger Capital said in its letter that the “discredited board has taken a number of reckless actions that go directly against the best interest of shareholders.”

The letter noted the apparent coup by the board in “stealthily and abruptly ousting American Apparel’s long-standing ceo and largest shareholder knowing that their actions will cause a near-imminent default under important contractual obligations of the company and cause it to default on nearly $10 million in loans.”

The loan referenced in the letter pertains to a $10 million loan by Lion Capital.

While not to be taken necessarily as a vote in support of Charney — Michael Bigger, who heads up trading firm Bigger Capital, reportedly made statements in support of Charney at the time of his ouster, but sources said that could have been due to concerns over the default-trigger provision under the Lion Capital loan agreement if Charney ceases to be ceo of the company — the letter noted other actions that the American Apparel board members took that Bigger Capital has deemed to be breaches of their fiduciary duty.

Bigger said Danziger should not be on the three-member committee that will continue to oversee the Charney probe: “We believe it is a clear disservice to shareholders and the integrity of the investigative process to place this decision partially in Mr. Danziger’s hands once again....We firmly believe that any related investigation must be overseen solely by individuals who will have an open-minded, fresh perspective on the matter and will be able to render an impartial decision....”

The letter also took issue with the “unilateral decision to adopt a shareholder-unfriendly rights plan,” also known as a poison pill, that had the effect of stifling shareholder input by “impeding the ability of shareholders to act together in engaging with the company’s management and the discredited board on critical issues regarding the leadership of our business.”

It remains to be seen whether Bigger Capital will get any support from other institutional investors. Sources said that as a practical matter, Bigger Capital has essentially two options: sell the investment stake in American Apparel or file a shareholder lawsuit.

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