(CN) – Former American Apparel CEO Dov Charney breached the terms of a $20 million deal with a hedge fund designed to help him regain control of the company after being suspended for misconduct, the Delaware Chancery Court ruled.
Standard General became involved with Charney in early 2014, a time when American Apparel was “marred by mismanagement and mounting debt,” and owing a $13 million bond payment.
American Apparel’s board was also becoming restive about its CEO in the face of alleged misuse of company funds and sexual harassment allegations.
After Charney was suspended as CEO on June 18, 2014, and resigned as board director the next day, he and Standard signed a letter of agreement to engage in a complex transaction in which Standard would buy at least 10 percent of American Apparel’s outstanding shares, then loan Charney approximately $20 million to buy them, the complaint says.
Catching wind of the deal, Standard General says, American Apparel adopted a “poison pill” — a one-year stockholder rights plan — that capped beneficial ownership of any person or group at 15 percent, and claimed the plan applied retroactively, effectively blocking consummation of the transactions contemplated by the letter of agreement.
Ultimately, Standard General, American Apparel and Dov Charney entered into a standstill agreement in which the hedge fund agreed to help it pay a pending $10 million loan and provide it with an additional $15 million in operating capital.
As part of this deal, Charney allegedly agreed he would not serve as an officer or employee of the company unless and until he was cleared by committee looking into the allegations against him.
But the investigation did not go Charney’s way and he was fired on Dec. 15, 2014.
The following year, American Apparel filed for bankruptcy.
Soon afterward, Charney sued the fund for $30 million, claiming his termination by the clothing retailer’s board was based on a bogus investigation and false claims.
Standard General then sued Charney in Delaware Chancery Court demanding immediate repayment of the loan.
On December 19, Chancellor Andre Bouchard found for Standard General on its claims that its contract with Charney was valid and enforceable.
“Charney first contends that Standard General represented it would ensure that he would retake control of the company. Charney could not have reasonably relied on any representation to this effect, however, given that the plain terms of the agreements he signed were to the contrary, both at the outset of his contractual relationship with Standard General and as that relationship evolved,” Bouchard's ruling states.
The contracts explicitly state that American Apparel’s Suitability Committee would oversee an investigation into Charney’s alleged misconduct, and there is no way Charney could reasonable have believed Standard would be able to control the outcome of that investigation, according to the 64-page opinion.
Bouchard also rejected Charney’s claim that he was somehow coerced into signing the agreements with Standard.
“Charney is a sophisticated businessperson who founded and served as the CEO of a public company, and who was represented by separate counsel when he entered into the Standstill Agreement. Undoubtedly, he was disappointed when American Apparel adopted a shareholder rights plan in response to his increased shareholdings in the Company, which complicated his hope to return as the Company’s CEO. He has not, however, come close to identifying a wrongful act that could be said to have overcome his free will in deciding to enter into the Agreements,” Bouchard wrote.
Because Charney breached the terms of the loans by challenging the validity of his contracts with Standard, Standard is entitled to immediate payment of the principal remaining on the $20 million it loaned to Charney, plus all accrued interest.