By  on July 8, 2014

Standard General is poised to move into the driver’s seat at American Apparel Inc. — but it’s still not clear just where the colorful basics company is going.

Led by managing partner Soo Kim, Standard teamed with ousted founder Dov Charney and now essentially controls 44 percent of the company’s stock, giving it the leverage it needs to negotiate changes to the Los Angeles-based firm’s board. The little-known New York investment firm might also help the company pay off the $10 million it owes to Lion Capital, which is said to have called its loan, although the company could still dispute that it has the right to do so.

There’s been no official release, but a source close to the retailer confirmed that its deal with Standard contemplates a seven-person board that would include Allan Mayer and David Danziger, currently co-chairmen of American Apparel. Under the preliminary understanding, three of the other five members would be appointed by Standard and the other two would be mutually agreed upon.

That would give the investor much more control of the company’s management.

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What role Charney might play at the firm going forward depends on the outcome of the investigation that led to his firing. After years of fending off sexual harassment suits, the company said Charney allowed explicit blog postings of a former employee who was suing him and signed off on significant severance packages for workers to shield himself from personal liability.

Charney has taken the company to arbitration for wrongful dismissal.

Standard noted in a regulatory filing Monday that its deal with Charney was structured to “gain control over” his shares, which, prior to the deal, represented 27.2 percent of the company’s stock.

“This transaction is not about the founder, nor is it an endorsement of him,” Standard said. “He is the largest shareholder, and the voting agreement allows us to control his block of shares….He can no longer vote his shares without our consent.”

Standard said American Apparel is threatened by debt defaults that could result in bankruptcy and described that as “an unfortunate outcome for a company with over 10,000 employees earning in excess of a living wage with subsidized, affordable health insurance and a socially conscious mission to manufacture in the USA.” Standard and Kim were “prepared to lend their credibility and capital resources to prevent this avoidable outcome in what…is otherwise a healthy business.”

But while American Apparel always had plenty of sex and headline appeal with the colorful Charney at the helm and its domestic manufacturing base, the company’s bottom line has continued to struggle.

Losses topped $106 million last year and the company also carries about $280 million in debt with a market capitalization of just over $153 million.

“They missed a good opportunity to scale the company earlier in its life cycle,” said Antony Karabus, ceo of Hilco Retail Consulting.

Karabus said the company still has opportunities, but that better-funded competitors such as Uniqlo have made big advances in the market.

“There’s still a market there, but I think the door is closing slowly,” he said. “This is what I would call the last major opportunity. This is the time where Standard General can really impose a top-notch management team, take out expensive debt and replace it with equity and I think make [the business] more sustainable.”

Craig Johnson, president of Customer Growth Partners, said American Apparel had a “deeply troubled franchise” and a brand that is now stronger internationally than domestically.

Shares of the company rose 2 cents to 89 cents Monday.

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