Retail

American Apparel May Have to Take CEO Back

blue jeans
Source: Thinkstock
When American Apparel Inc. (NYSE: APP) fired its chief executive, the firing triggered a covenant on a $10 million loan that puts the loan into default. In order to cure that default, American Apparel’s board may have to take back the company’s founder and now ousted CEO, Dov Charney.

American Apparel announced on Saturday that the company has adopted a one-year stockholder rights plan. The plan is the direct result of a lawsuit threatened by Charney in order to regain control of the company he founded.

The stockholder rights plan takes effect if any shareholder who already holds 15% or more of the company’s stock tries to accumulate more. Charney owns 27% of American Apparel’s outstanding shares, and he said on Friday that he was looking to acquire another 10%.

American Apparel’s stock has more than doubled since posting a 52-week low of $0.46 on April 8. The stock nearly doubled from a low of $0.51 just last Wednesday. Shares dipped last week when Charney said he would fight to get his job back. Then they rose when the company said it had hired a firm to help it raise cash, and shares really took off at the end of the day Friday as a battle for control loomed.

American Apparel’s $10 million lender, Lion Capital, has so far denied the company’s request for a waiver of the default provision. The company apparently has not yet found a way of coming up with $10 million by Friday, the deadline for repayment.

One possibility is a new loan and another is selling more stock. Finding a lender will be difficult, given the company’s turmoil. Issuing more stock may not do the trick either. American Apparel has issued about 176 million of its 230 million authorized shares.

The remaining 54 million shares are theoretically enough to cover the company’s needs, but the question is how big a discount will American Apparel have to offer in order to find any takers. And if the board increases the number of authorized shares, what will they be worth?

The simplest, cheapest solution is to take Charney back. Of course then the whole board would likely have to go, and so on and on and on.

The stock traded down nearly 10% in Monday’s premarket, at $0.87 in a 52-week range of $0.46 to $2.09.

ALSO READ: Key Stocks With Insider Selling This Week

Sponsored: Find a Qualified Financial Advisor:

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.