Board of Directors
American Apparel, Inc.
747 Warehouse Street
Los Angeles, California 90021
Dear Members of the Board of American Apparel:
The Bigger Capital Fund, LP, Bachelier, LLC and the Bigger Family are significant shareholders of American Apparel, Inc. (NYSE: APP) ("American Apparel" or the "Company"). We have followed the recent developments at American Apparel with a growing sense of puzzlement and concern. We have become confident that American Apparels' entire Board of Directors (the "Discredited Board") -- all seven of its current members -- have caused serious damage to the value and reputation of the Company. American Apparel, a household institution with strong business fundamentals and great prospects has been brought to the brink of financial distress and all this, in our view, because of the reckless actions of the set of directors who were responsible for overseeing our business and protecting the value of our investment.
We are extremely gratified to see that five of the current seven directors will be replaced with new members of the Board under the recently disclosed arrangement dated July 9, 2014 with Standard General L.P. and certain of its affiliates and Dov Charney, now former CEO of American Apparel (collectively, the "Standard General Group"). However, there can be no justification for the two remaining discredited incumbents, David Danzinger and Allan Mayer, to stay on. We firmly believe that Messrs. Danzinger and Mayer, who are supposed to remain as directors and Co-Chairmen of the Board, are directly responsible for the value erosion and reputational harm to the Company and as a result have lost the confidence and support of the shareholders and should immediately resign.
The Discredited Board has taken a number of reckless actions that go directly against the best interest of shareholders. Most shockingly, this Board engaged in an apparent coup stealthily and abruptly ousting American Apparel's long-standing CEO and largest shareholder knowing that their actions will cause a near-imminent default under important contractual obligations of the Company and cause it to default on nearly $10 million in loans. Worse, the Discredited Board kept shareholders entirely in the dark about its plans to change the effective control of our company. The Discredited Board calculatedly waited until shareholders (including Mr. Charney with his then approximately 23% stake) had cast their votes to reelect them at the annual meeting on June 18 and then quickly reconvened just minutes after the closing of the polls and voted to oust Mr. Charney from his position as a CEO (and imminently under the terms of his employment agreement as a director of the Company, a position to which the shareholders of American Apparel had elected him on June 25, 2013). Messrs. Danzinger and Mayer had fiduciary duties to do what is best for us, the owners of the Company. Messrs. Danzinger and Mayer are bound not only by their responsibilities as our fiduciaries, but also by the proxy rules to inform shareholders of all information that shareholders may consider material to their voting decision prior to casting their vote. It is mindboggling that Messrs. Danzinger and Mayer would not have thought that shareholders would want to know of their plans to uproot the senior leadership of our Company before voting on the election of directors. In our view, Messrs. Danzinger and Mayer have breached their fiduciary duties to shareholders and withheld material information that should have been disclosed in the Company's proxy materials for the annual meeting.
To add injury to insult, on the heels of your unilateral decision to overhaul the Company's leadership, this Board made another unilateral decision to adopt a shareholder-unfriendly rights plan a/k/a poison pill. The effect of this shareholder rights plan was to stifle shareholder input by impeding the ability of shareholders to act together in engaging with the Company's management and the Discredited Board on critical issues regarding the leadership of our business.
It is unclear to us how the continuity of Messrs. Danzinger and Mayer on the Board is a positive for shareholders. For example, during Mr. Danzinger's tenure American Apparel's stock price has fallen from $1.72 in 2011 to today's $1.15. Similarly, during Mr. Mayer's tenure which started in 2007, American Apparel's shares have lost 92% of their value. With such poor track record it is hard to see why directors Danzinger and Mayer should continue to act as stewards of the shareholders' capital. Notably, leading proxy vote advisory firm, Institutional Shareholder Services (NYSE:ISS) recommended a "withhold" vote last year with respect to the reelection of David Danziger as a result of his service on more than three public boards while serving as a CEO of an outside company. Under ISS corporate governance guidelines there are serious concerns that Mr. Danziger may have too many board engagements to devote the proper amount of attention to American Apparel. We share the concern.
Furthermore, under its agreement with the Standard General Group, the Company has agreed to form a new committee of independent directors of the Board, the Suitability Committee, for the purpose of overseeing the continuing investigation into alleged misconduct by Dov Charney. Mr. Danziger, one of the directors who made the decision to oust Mr. Charney in the first place, will serve as one of the three members of this committee. We believe it is a clear disservice to shareholders and the integrity of the investigative process to place this decision partially in Mr. Danziger's hands once again. It is clear that Mr. Danziger's decision has already been made and he never thought it necessary to see the results of a completed investigation before making it. We firmly believe that any related investigation must be overseen solely by individuals who will have an open-minded, fresh perspective on the matter and will be able to render an impartial decision untainted by their prior involvement in Mr. Charney's ouster.
Directors Danzinger and Mayer and their fellow members of the Discredited Board should have informed shareholders of the investigation into Mr. Charney's conduct from its outset. This is critical information that shareholders had the right to know. Instead, the Board completely mismanaged the process by concealing the allegations and investigation from the investment public and then choosing to act unilaterally to oust Mr. Charney with no explanation to shareholders until after the fact, all mid-way through the ongoing investigation.
It is also noteworthy, that this same Board that has felt compelled to oust Mr. Charney even if it means defaulting on close to $10 million in loans, chose to disregard the Company's poor operating and financial results from 2007 through 2012 and reward Mr. Charney by extending the maturity of the Charney Anti-Dilution Provision which entitled him to up to approximately 20,416,000 shares of the Company's common stock as anti-dilution protection (decision we criticized publicly at the time, see our letter to the Board available here, http://biggercapital.squarespace.com/biggercapital-investment/2013/10/10/american-apparel-memorandum.html ).
In short, Messrs. Danzinger and Mayer have made seemingly arbitrary decisions taking reckless risks with our capital and jeopardizing our business with little regard for shareholder interests or the future of our Company. All seven current directors must be held accountable for this blatant disregard of shareholder rights and value. Accordingly, we demand and expect that directors Danziger and Mayer immediately tender their resignations from the Board and all of its committees.
We look forward to a new chapter for American Apparel under the oversight of a thoroughly new Board uncompromised by the current Board's disastrous decisions of the recent and far past.
Bigger Capital Fund, LP
Disclosure: The author is long APP. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.