American Apparel accepts $25M bailout from Standard General

American Apparel Inc. has reached a preliminary deal with investment firm Standard General to receive a $25-million investment to bolster the clothing chain's finances, a person close to the negotiations said Wednesday.

The deal will help pay off a $10-million loan from investment firm Lion Capital, which made a formal demand for payment Monday. Lion Capital claimed that the chain defaulted under its credit agreement because it ousted its founder and CEO Dov Charney.

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The pact will also mean shaking up American Apparel's board of directors, said the person, who spoke on condition of anonymity because of the sensitivity of the discussions. The deal is expected to be announced later Wednesday.

Standard General, a New York investment firm, already holds 43 per cent of American Apparel shares.

What remains to be seen is what role Charney will play.

Charney and Standard General

On June 18, the Los Angeles-based company's board fired Charney as chairman and suspended him as president and CEO. His contract requires a 30-day period before he can be terminated. The board cited "alleged misconduct."

Charney signed a five-year loan agreement two weeks ago with Standard General to increase his stake in American Apparel to 43 per cent, but the terms strip him of his rights to vote on those shares without Standard General's consent.

According to the terms, Charney agreed that he will not serve on the board nor play any leadership role in the company until the investigation is complete. And Charney will not serve a role at the company if he is deemed "unfit."

Standard General said Monday in a regulatory filing that it has "opened a constructive, detailed and substantive dialogue with members of the current board."

According to the terms of the agreement between American Apparel and Standard General, co-chairmen Allan Mayer and David Danziger will be the only current directors who will stay on the seven-member board.