Dov Charney’s six-month dance with the company he founded came to an end this month when the board of American Apparel Inc. fired him for cause.
All that’s left now is for the legal duel to begin.
This story first appeared in the December 19, 2014 issue of WWD. Subscribe Today.
Charney’s always been one of the most colorful characters in fashion; famously libertine, living with young employees in his L.A. mansion, serving as fit model for the brand’s underwear and repeatedly fending off allegations of sexual harassment.
He stood out on the business side, as well, tossing aside industry convention, building a substantial international business out of blank T-shirts that were made in the U.S. He stuck to his vision and managed to grow while other brands solidified their overseas production and went logo-crazy.
Charney’s micromanaging stewardship also led to criticisms that he was a one-man band or didn’t focus enough on building back-office operations that matched the brand’s potential.
American Apparel has suffered years of losses, and Charney jumped from backer to backer, accepting higher interest rates in the process.
After years, it all came to a head in June, when the board voted Charney out as chairman and suspended him as president and chief executive officer, alleging misconduct. The ceo was said to have failed to prevent defamatory blog posts regarding a former female employee and signed off on significant severance payments for former employees to shield himself from liability.
The ouster caught Charney by surprise, but he regained his balance quickly and charged on, inking a deal with little-known investor Standard General.
Charney borrowed nearly $20 million from Standard General to buy 27.4 million shares of the retailer. That boosted his stake in the company to 44 percent from 27.2 percent, but tied him to the investment firm — neither party could vote their shares without the other’s consent.
“This transaction is not about the founder, nor is it an endorsement of him,” Standard General said at the time. “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 General also extended $25 million in support to American Apparel and, more importantly, gained considerable sway over the firm’s board, which was substantially overhauled.
Sources said the board investigated Charney and found enough cause for termination, but in an effort to avoid a legal battle also tried to cut a deal that would have let him stay on in some capacity.
An agreement was close, but fell apart early this month. So the board was back to where the former board started, but with the completed investigation into allegations against Charney in hand.
A statement from American Apparel said, “Based on this investigation, the special committee [of board members] determined that it would not be appropriate for Mr. Charney to be reinstated as ceo or an officer or employee of the company.”
He also ceased operating as a consultant for the retailer, which is entirely intermingled with his personality and sensibilities.
“I’m proud of what I created at American Apparel and am confident that, as its largest shareholder, I will have a strong relationship with the company in the years ahead,” Charney said in a statement. “Naturally, I am disappointed with the circumstances and my over 25 years of deep passion and commitment for American Apparel will always be the core DNA of the company.”
The expectation is that it’s a relationship the two parties will have to ultimately work out in the courts.
Meanwhile, the company is moving on.
Paula Schneider is stepping in as ceo. She’s held senior roles at Warnaco, BCBG Max Azria and Laundry by Shelli Segal and on Jan. 5 will take over from the interim ceo, Alvarez & Marsal executive Scott Brubaker.
Schneider has her work cut out for her. The company lost $19.2 million in the third quarter, weighed down in part by $5.3 million in legal and consulting fees tied to the back-and-forth with Charney.
“My goal is to make American Apparel a better company, while staying true to its core values of quality and creativity and preserving its ‘sweatshop-free, Made in USA’ manufacturing philosophy,” Schneider said.
American Apparel might become a better company for this. But it could hardly be more interesting.