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Did Dov Charney Just Lose Control of American Apparel?

If, like me, you're a fan of high-quality T-shirts and ass-less pantyhose, then you'll be rejoicing at the news that American Apparel (APP) has been saved from bankruptcy by $15 million in financing from new investors.

Not much is known about the new investors, but they may have secured the rights to buy up to $43 million in APP stock at a discount price. If that is the case, it could mean that CEO Dov Charney may no longer own a majority of the company's stock. And that means angry investors or his own directors finally have the power to fire him as the company's top executive.

We'll have to wait until American Apparel files a disclosure with the SEC describing the math in detail, but using numbers from the above-linked reports from Bloomberg and The New York Post it appears that Charney may no longer own 54 percent of all APP's stock, which was his holding as described on page 28 of the 2010 annual report.

Until yesterday, there were 71.6 million outstanding shares. Charney owned about 54 percent of them. (The proxy form says he owns 44.9 million shares, which would mean there are 83 million shares in total, but for the sake of back-of-the-envelope math we'll stick with 71.6 million.)

The new investors bought $15 million of shares at 90 cents each, or about 16.6 million new shares. Already, that makes Charney a minority owner. The Post said Charney also kicked in another $700,000. Historically, Charney has demanded new treasury stock for his cash investments. Even if he paid $1/share, he would still own less than 50 percent of the company.

The investors also get the right to buy another $28 million in stock at the 90 cents price. As APP closed yesterday at $1.24, they will likely exercise that option -- diluting Charney's holdings even further. The new owners could get as many as 38.7 million shares in total at 90 cents/share. That would leave Charney with about 40 million shares and everyone else with 71.6 million -- more than enough to out-vote him.

There appears to be just one catch, the Post said:

In addition, Charney will be given the opportunity to counteract dilution from the deal with stock options that will vest if American Apparel's stock continues an upward climb during the next four years. Specifically, Charney's options will vest if the company's stock hits $3.25 next year, $4.25 in 2013 and $5.25 in 2014.
Just how many options will vest isn't clear. American Apparel's proxy form states that Charney has not received any options in the last three years. Charney, however, is a famous control freak. How likely is it that he just sold his birthright -- a company with half a billion in annual revenues -- for just $15 million in cash?


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