Now that downtown L.A. clothing maker and retailer American Apparel has filed for Chapter 11 bankruptcy protection, where does it leave its largest shareholder, founder and former Chief Executive Dov Charney?
Charney, forced from management of the company June 2014 and fired in December, has been on a behind-the-scenes campaign to pressure the company to change its leadership. He supported company employees as they organized into a labor union and spoke out against the company as it reduced work hours. He also lobbed several lawsuits at the company, joined by other former employees and shareholders.
But American Apparel’s Chapter 11 bankruptcy filing Monday could put a major roadblock in his attempt to regain control of the ailing business. Such filings typically leave shareholders empty-handed, said Chell Chelliah of C&A Inc., a turnaround and forensic accounting firm in Manhattan Beach. Shareholder equity is zero during a bankruptcy, because liabilities exceed the fair value of assets, one of the situations which usually drives a company into insolvency, he added.
“When liability exceeds assets, the shareholders are ‘out of money,’ and the creditors are actually financing the company,” Chelliah said. “Therefore, the fiduciaries now running the company are responsible for acting in the best interest of creditors.”
Charney, who owns 75 million shares of the company, about 41.5 percent, declined to comment.
John Brooks, an American Apparel shareholder and a former business development executive at the company under Charney, is now chief executive of Imagineer, a London-based consumer brand development company.
“Obviously, today’s filing, if accepted, is not great news for any stockholders, particularly the significant and invested holders like Dov,” wrote Brooks in an email.
Brooks said he had no idea whether Charney will be able to regain control of the retailer.
“Not sure how that whole thing blew up so badly,” Brooks wrote, “but I do know that long-suffering stockholders and employees have borne the brunt of the corporate stupidity/skullduggery that has been imposed upon the company for the last 18 months.”
Because shareholders have limited protections in Chapter 11 proceedings, Chelliah added, those, like Charney, who hope to gain control of the company must start all over again to raise investor interest.
But, he added, new money has to come in for that to work. New shareholders and old shareholders will get some control, but have to share it with creditors who may also be new shareholders.