EFiled: May 15 2015 05:02PM EDT
Transaction ID 57245333
Case No. 11033-

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
AMERICAN APPAREL, INC.,
Plaintiff,
v.
DOV CHARNEY,
Defendant.

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C.A. No. _________-___

VERIFIED COMPLAINT
Plaintiff American Apparel, Inc. (“American Apparel” or the
“Company”), by its undersigned attorneys, alleges upon personal knowledge as to
its actions, and upon information and belief as to all other allegations herein, as
follows:
NATURE OF THE ACTION
1.

Dov Charney, American Apparel’s founder and former

President, Chief Executive Officer and Chairman of the Board, refuses to abide by
the obligations to which he agreed in a July 9, 2014 Nomination, Standstill and
Support Agreement (the “Standstill Agreement”) entered into by him, the
Company, and hedge fund Standard General L.P. (“Standard General”).1 The

The Standstill Agreement is attached hereto as Exhibit A. Section 11 provides
that “[t]his agreement shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of Delaware applicable to
contracts executed and to be performed wholly within such state without giving
effect to the choice of law principles of such state.”
1

 Company is bringing this lawsuit to remedy and prevent further breaches of the
Standstill Agreement by Mr. Charney, and to prevent further harm to the Company
by such breaches.
2.

Mr. Charney’s outlandish behavior has been well documented

in the press. (See, e.g., http://www.claudineko.com/storiesamericanapparel.html)
His conduct as CEO has led to countless allegations of sexual harassment brought
by former employees. (See, e.g., http://jezebel.com/dov-charney-was-fired-formaking-employee-his-sex-slave-1594191826 (noting that “[i]t’s tough to imagine
which of his equally disturbing sex crimes finally motivated the American Apparel
board to fire CEO Dov Charney”)) He also repeatedly made distasteful comments
about employees while acting as CEO. (See http://nypost.com/2015/05/07/dovcharney-called-his-workers-sluts-and-pigs-documents/) (“As CEO, [Mr. Charney]
described certain employees as ‘sluts’ and ‘pigs’ and threatened others while
‘punching holes in tables and throwing things’”))
3.

In addition, there are numerous other instances involving Mr.

Charney’s misuse of Company property and funds, and mistreatment of female
employees, that formed the basis for his suspension in June 2014, and ultimately
his termination and removal from the Company as an officer and employee in
December 2014. In response to these events, Mr. Charney has become obsessed

2

 with retribution against the Company and has made it his mission to “take back the
Company.”
4.

Mr. Charney publicized his intentions in a recent 20/20

interview, in which he stated that he was “re-strategizing how [he] want[s] to take
back the Company again,” and believes that he is “gonna get it back.” One news
report recently referred to Mr. Charney as “an ousted founder refusing to let go,
stirring up all kinds of trouble in the process,” and another stated that he is
“doggedly fighting to get back his company.”
5.

Indeed, in an unprecedented effort to disrupt and harm the

Company, Mr. Charney has launched a scorched earth campaign that exceeds all
bounds of propriety. Among other things, since the execution of the Standstill
Agreement and his subsequent termination, Mr. Charney has trespassed on
Company property; interfered with Company conference calls and criticized
Company employees for the manner in which they handled these calls; demanded
employees handle the day-to-day operations of the Company in accordance with
his instructions; called employees on the telephone demanding Company
information such as sales reports; and threatened employees who refuse to support
his return by taking their photographs and promising to fire them when he returns
to power. Upon information and belief, Mr. Charney has also sabotaged American

3

 Apparel’s relationships with its suppliers, and has informed potential financing
sources that any deal with the Company must come through him.
6.

Mr. Charney has also flagrantly and repeatedly made a number

of disparaging comments about the Company to the press that violate the Standstill
Agreement. Yet, at the same time, he is attempting in many respects to act as the
“man behind the curtain,” manipulating friends and Company employees behind
the scenes in a lame effort to obfuscate the fact that he is violating the Standstill
Agreement in order to regain control of the Company.
7.

For example, Mr. Charney has recently launched a legal

campaign against the Company, using a friend and former employee, his college
roommate, and a woman with whom he has had a relationship to do his bidding
and seek the removal of certain American Apparel directors in the California and
Delaware courts. His attorney, Keith Fink, has also filed no less than a dozen
separate National Labor Relations Board unfair labor practice charges against the
Company purportedly brought on behalf of American Apparel employees.
8.

In addition, Mr. Charney is attempting to manipulate the

Company’s labor force as part of his effort to take back control of the Company.
Mr. Charney has recently joined employee meetings where he has participated in
rallying them to circulate flyers touting the fact that “Dov is fighting in the courts
to regain control of the company,” send emails, and even circulate photographs of
4

 children holding picket signs seeking the removal of current Board members. Mr.
Charney has even gone so far as to cause a Company employee to send mass
emails from Mr. Charney’s home to other employees promoting litigation seeking
to oust members of the Company’s current board of directors (the “Board”).
9.

Mr. Charney has gone too far, and the curtain has now been

pulled back, revealing that he has clearly breached the unambiguous terms of the
Standstill Agreement. That agreement provides:
(a) “Charney will not serve as a Board member . . .”;
(b) Until after the 2015 annual meeting, Mr. Charney may not
“seek the removal of any member of the Board or propose any nominee for
election to the Board or seek representation on the Board . . . ”;
(c) Until after the 2015 annual meeting, Mr. Charney may not
“instigate, encourage, join, act in concert with or assist any third party to,” among
other things, seek the removal of any member of the Board;
(d) Until after the 2015 annual meeting, Mr. Charney may not
“publicly propose or participate in . . . any extraordinary corporate transaction,” or
“purchase or cause to be purchased or otherwise acquire or agree to acquire
beneficial ownership of any shares of Common Stock . . . ”;
(e) “Charney shall not serve as CEO of the Company or serve
as an officer or employee of the Company . . . unless . . . the Suitability Committee
makes a Clearance Determination in favor of such service,” which did not occur;
and
(f) Mr. Charney “shall refrain from making or causing to be
made . . . any statement . . . that disparages or otherwise negatively reflects upon
the Company . . . .”
10.

These express provisions lay plain the purpose of the Standstill

Agreement: Mr. Charney is not ever to return to the Company as either an
5

 employee or a member of American Apparel’s Board, will not seek to take control
of the Company until at least after the 2015 annual meeting, and will refrain from
disparaging the Company and its employees. Through his actions, however, Mr.
Charney continues to violate both the express terms and the spirit of the Standstill
Agreement. He refuses to acknowledge that he simply cannot return to the
Company and cannot participate in or instigate efforts to return him to the
Company.
11.

Since entering into the Standstill Agreement, Mr. Charney has

interfered with the Company’s ongoing operations, has assisted in seeking the
removal of Board members, has participated in employee meetings advocating his
return, has disparaged the Company and its management, has hired corporate
advisors and, according to the press, has participated in one indication of interest
concerning a potential acquisition of the Company. The press has described Mr.
Charney as “stirring up trouble” because he is “determined to return to the
company.” (http://www.buzzfeed.com/sapna/internal-american-apparel-datashows-sales-slumping)
12.

Indeed, the mosaic painted by Mr. Charney’s actions is clear:

He is doing anything but “standing still,” and instead is engaged in an ongoing
subversion of the Company’s rebuilding efforts.

6

 13.

The Company and its Board is, and must be, in the business of

operating for the benefit of its stockholders. The Company must focus on its core
operations to complete its turnaround from the poor financial performance the
Company suffered during the last years of Mr. Charney’s reign as CEO and
Chairman of the Board. Indeed, the Company’s current turnaround plan is
necessitated by the harm that occurred under Mr. Charney’s tenure.
14.

The Company cannot and should not be in the business of

constantly responding to Mr. Charney’s disruption, disparagement and lawsuits,
much less any takeover attempt. Blocking and preempting Mr. Charney’s efforts
to disrupt the governance of the Company and its corporate operations in an effort
to regain control is precisely the benefit for which the Company bargained when it
entered into the Standstill Agreement with Mr. Charney back in July 2014. This
benefit is precisely what the Company has not received and will not receive absent
judicial intervention.
15.

Consequently, American Apparel has no choice but to seek

judicial intervention to hold Mr. Charney to the very promises he made (with the
advice of his own counsel) so that the Company and its stockholders receive the
benefit of their bargain under the Standstill Agreement.
16.

Through this action, therefore, the Company now seeks specific

performance of the terms of the Standstill Agreement. The Company also seeks
7

 injunctive relief prohibiting Mr. Charney from breaching the terms of the Standstill
Agreement, as well as a judgment on its claims that Mr. Charney’s initiation of or
assistance in various lawsuits and statements made in the press and at employee
meetings breached the standstill and non-disparagement provisions of the Standstill
Agreement. Moreover, the Company seeks redress for Mr. Charney’s breach of
the implied covenant of good faith and fair dealing by attempting to continue to
manage the Company in violation of the spirit of the Standstill Agreement.
THE PARTIES
17.

Plaintiff American Apparel is a Delaware corporation with its

headquarters in Los Angeles, California. American Apparel is a vertically
integrated manufacturer, distributor, and seller of clothing and related items,
operating 239 retail outlets and employing approximately 10,000 employees in 20
countries worldwide (with approximately 6,000 of those employees working at one
of American Apparel’s five manufacturing facilities in and around downtown Los
Angeles, California).
18.

Defendant Dov Charney served as American Apparel’s

President and CEO until he was suspended from that position on June 18, 2014.
Mr. Charney also served as a director on American Apparel’s Board until he
resigned on July 19, 2014, pursuant to the Standstill Agreement (agreeing never
again to serve on the Board). Thereafter, as contemplated by the Standstill

8

 Agreement, a Suitability Committee of the Board, comprised of independent
directors, oversaw an extensive investigation conducted by FTI Consulting, Inc.
into his misconduct. As a result of that investigation, Mr. Charney’s employment
at American Apparel was terminated for cause in December 2014. Mr. Charney’s
only connection to the Company at this point is as a stockholder.
JURISDICTION
19.

This Court has subject matter jurisdiction over this matter

pursuant to 10 Del. C. § 341 and 10 Del. C. § 6501.
20.

This Court has jurisdiction over Mr. Charney pursuant to

Section 11 of the Standstill Agreement, which provides that “each of the parties
hereto (a) consents to submit itself to the exclusive personal jurisdiction of the
Court of Chancery or other federal or state courts of the State of Delaware in the
event any dispute arises out of this Agreement or the transactions contemplated by
this Agreement, (b) agrees that it shall not attempt to deny or defeat such personal
jurisdiction by motion or other request for leave from any such court, (c) agrees
that it shall not bring any action relating to this Agreement or the transactions
contemplated by this Agreement in any court other than the Court of Chancery or
other federal or state courts of the State of Delaware, (d) irrevocably waives the
right to trial by jury and (e) irrevocably consents to service of process by a
reputable overnight mail delivery service . . . .”

9

 FACTUAL BACKGROUND
A.

Mr. Charney Is Suspended As CEO Pending Board Investigation Into
His Misconduct.
21.

During his tenure as CEO, Mr. Charney became known for his

inappropriate behavior. (http://gawker.com/tag/dov-charney) Mr. Charney’s
actions – some of which led to the filing of numerous sexual harassment lawsuits
by former American Apparel employees – have caused financial and reputational
harm to the Company, with the Company bearing the financial impact of these
lawsuits or settlements arising out of Mr. Charney’s actions.
22.

In Spring 2014, the Company began investigating Mr. Charney

for alleged misconduct. On June 18, 2014, American Apparel’s Board met and,
based on the ongoing investigation being conducted by the Company’s Audit
Committee, the independent directors presented Mr. Charney with two options
regarding his employment.
23.

One option would have allowed Mr. Charney to continue to

work as a paid consultant for the Company. The Board offered such consulting
option as a compromise, pursuant to which Mr. Charney would not have
supervisory authority over employees or any financial authority, while the
Company would avoid an all-out war against the Company’s founder.
24.

The other option would have suspended Mr. Charney pending

completion of a formal investigation.
10

 25.

When negotiations failed after several hours, the Board voted to

suspend Mr. Charney, effective July 19, 2014, pending an investigation into
whether he should ultimately be terminated for cause. Mr. Charney’s suspension
was formalized in a letter (the “Suspension Letter”), which noted that, inter alia,
Mr. Charney:
 Permitted a Company employee to create and maintain false and
defamatory blog posts about former Company employees;
 Presented significant severance packages (paid for by the Company
itself and not Mr. Charney) to numerous former employees in order to
ensure that Mr. Charney’s misconduct with regard to those employees
would not subject him to personal liability;
 Repeatedly engaged in conduct that violated the Company’s sexual
harassment and anti-discrimination policies, and created significant
risks of liability on the part of the Company;
 Interrupted sexual harassment training mandated by California law, in
violation of the Company’s Code of Ethics;
 Made derogatory and disparaging comments directed at persons of
certain ethnicities or related to certain persons’ gender, sexual
orientation and/or religious persuasion; and
 Misused corporate assets for personal reasons without approval of the
Board.
B.

After His Suspension, Mr. Charney Attempts To Use His Knowledge To
Take Control Of The Company And Return Himself To Power.
26.

Following his suspension, Mr. Charney defiantly made it clear

to anyone who would listen that he was going to take the Company back no matter
what. Among other things, he sought to “creep” up to numerical control of the
11

 Company by increasing his American Apparel stock holdings through
accumulation of shares in the marketplace.
27.

On June 23, 2014, Mr. Charney filed a Schedule 13D (the “June

23 Filing”) with the United States Securities & Exchange Commission. In the June
23 Filing, Mr. Charney noted that, “[e]ffective immediately, the Board suspended
Mr. Charney. . . . The Board also removed Mr. Charney as Chairman of the Board
effective immediately.”
28.

The June 23 Filing further noted:

Following the announcement on June 18, 2014, made by the Issuer of
its intent to terminate Mr. Charney’s employment, Mr. Charney was
approached by certain persons (the “Supporters”), including
stockholders of the Issuer, who expressed support for his continued
leadership of the Issuer. On June 19, 2014, Mr. Charney began to
discuss with the Supporters potential changes to the composition of
the Board and management of the Issuer.
...
Mr. Charney intends to engage in discussions with the Issuer and
Issuer’s management and the Board, other stockholders of the Issuer
and other persons that may relate to the afore mentioned matters
and/or other matters related to governance and board composition,
management, operations, business, assets, capitalization, financial
condition, strategic plans and the future of the Issuer.
29.

Also on June 23, 2014, Mr. Charney sent an 8 Del. C. § 220

demand (the “Demand Letter”) to the Company seeking, inter alia, a list of the
Company’s stockholders. The Demand Letter specified that its purpose was to

12

 enable Mr. Charney to communicate with the Company’s stockholders regarding
matters specified in the June 23 Filing.
30.

Mr. Charney’s efforts to take control of the Company continued

after the filing of the Demand Letter. On June 26, 2014, the Company learned
from its proxy solicitor that 23 million shares of the Company’s stock (a highly
unusual number) were traded after the stock market’s close. The Board also
became aware of a rumored agreement between hedge fund Standard General and
Mr. Charney that would allow Mr. Charney to gain control of a higher percentage
of the Company’s voting stock.
31.

A later SEC filing confirmed Mr. Charney’s arrangement with

Standard General. On June 25, 2014, Mr. Charney signed a letter agreement (the
“Letter Agreement”), pursuant to which Standard General agreed to enter into a
cooperation agreement with Mr. Charney once Standard General acquired 10% or
more of the Company’s outstanding equity. The cooperation agreement provided
that Standard General’s and Mr. Charney’s shares would be voted only as agreed
between those two parties. Mr. Charney stated in the filing that he understood that
Standard General had acquired at least 10% of the Company’s outstanding equity.
32.

In addition, notwithstanding his suspension, Mr. Charney –

purporting to act in his former capacity as CEO – attempted on June 27, 2014 to set
a meeting of the Company’s stockholders for September 25, 2014. The meeting’s
13

 purpose was to elect a slate of his compatriots to the Board and, in doing so, take
control of the Company himself – thereby circumventing the Board’s process, and
corporate governance, entirely.
C.

The Company Takes Steps To Prevent Mr. Charney’s Takeover
Attempt.
33.

Mr. Charney’s maneuvering against the Company did not go

unnoticed. At a special meeting of the Board held on June 27, 2014, Mr. Charney
told the Board that his plan to take control of the Company was a fait accompli,
and suggested that the Company prepare for his return to power. At the same
meeting, the Board delegated powers to an Executive Succession Committee (the
“Committee”) to the fullest extent possible under the Company’s bylaws and
Delaware law. The Committee met later that evening to consider certain protective
corporate governance measures and adopted the Rights Plan described below. As
the Board worked to protect the Company, Mr. Charney attempted to derail the
Board’s efforts and used his position on the Board to vote against formation of the
Committee.
34.

At meetings held on June 27 and 28, 2014, the Board (at the

Committee’s recommendation) adopted the Rights Plan and adopted certain
amendments to the Company’s bylaws.

14

 D.

Mr. Charney, Standard General, And American Apparel Enter Into
The Standstill Agreement To Prohibit Mr. Charney From Taking
Control Of The Company.
35.

Shortly thereafter, discussions commenced between the

Company, Standard General and Mr. Charney on a path forward. On July 9, 2014,
Mr. Charney, Standard General, and American Apparel entered into the Standstill
Agreement to end Mr. Charney’s attempts to take over the Company. In the
Standstill Agreement, Mr. Charney specifically agreed never to serve again as a
director of the Company; never to serve again as CEO or an employee unless
cleared by the Suitability Committee investigating his conduct (which did not
happen, as discussed herein); not to disparage the Company; and to abide by
significant standstill restrictions through the end of the Company’s 2015 annual
meeting (which has not yet been held).
36.

The Standstill Agreement also resulted in a change to the

Board’s composition. Prior to the Standstill Agreement, the Company had a
staggered Board comprised of David Danziger, Robert Greene, and Allen Mayer as
“Class A” directors; Alberto Chehebar and William Mauer as “Class B” directors;
and Mr. Charney and Marv Igelman as “Class C” directors. Pursuant to the
Standstill Agreement, the Board was reconstituted with Mr. Danziger, Mr. Mayer,
and David Glazek serving as “Class A” directors; Laura Lee and Thomas Sullivan

15

 serving as “Class B” directors; and Colleen Brown and Joseph Magnacca serving
as “Class C” directors.2
37.

The Standstill Agreement also contains several express

contractual protections against any renewed attempt by Mr. Charney to take over
the Company. For example, Section 1 of the Standstill Agreement, which covers
“Board Matters,” explicitly provides that “Charney will not serve as a Board
member or be nominated by the Company or Standard General as a Board
member.” There is no time limit on this restriction.
38.

Section 3 of the Standstill Agreement contains “Standstill”

39.

Specifically, Section 3(c) of the Standstill Agreement provides

provisions.

that, “[u]ntil completion of the 2015 Annual Meeting,” Mr. Charney may not
“present at any Special Meeting of Stockholders or through action by written
consent any proposal for consideration for action by stockholders or seek the
removal of any member of the Board or propose any nominee for election to the
Board or seek representation on the Board . . . .” (emphasis added)
40.

Further, Section 3(h) of the Standstill Agreement prohibits Mr.

Charney from “instigat[ing], encourag[ing], join[ing], act[ing] in concert with or
2

In addition, two designees were placed on the Board by Lion Capital (Guernsey)
II Limited.

16

 assist[ing] any third party to do any of the foregoing.” Thus, Sections 3(c) and 3(h)
combine to prohibit, among other things, Mr. Charney from “instigat[ing],
encourage[ing], join[ing], act[ing] in concert with or assist[ing] any third party” in
seeking to remove a director of the Company.
41.

In addition, Section 3(a)(ii) prohibits Mr. Charney from

“encourag[ing] any other person to solicit or withhold any proxy, consent or other
authority with respect to any shares of Common Stock or otherwise advise,
encourage or influence any other person with respect to voting any shares of
Common Stock . . . .”
42.

Section 3(e) of the Standstill Agreement prohibits Mr. Charney

from “publicly propos[ing] or participat[ing] in . . . any extraordinary corporate
transaction,” and Section 3(f) of the Standstill Agreement prohibits Mr. Charney
from “purchas[ing] or caus[ing] to be purchased or otherwise acquir[ing] or
agree[ing] to acquire beneficial ownership of any shares of Common Stock . . . .”
43.

In addition, Section 6 of the Standstill Agreement contains a

broad non-disparagement clause. Specific to Mr. Charney, Section 6(b) of the
Standstill Agreement provides that he:
shall refrain from making or causing to be made to any third party, including
but not limited to by press release or similar public statement to the press or
media or to any analyst, any statement or announcement, whether orally or
in writing, that disparages or otherwise negatively reflects upon the
Company, its employees, officers or directors or any person who has served
as an employee, officer or director of the Company in the past, or who
17

 serves on or following the date of this Agreement as an employee, officer or
director of the Company.
44.

Finally, Section 5 of the Standstill Agreement contains

provisions addressing the investigation of Dov Charney, which was to be
conducted by a Suitability Committee of the Board. Among other things, Mr.
Charney agreed that he “shall not, in any way, interfere with or attempt to
influence the outcome of the investigation” (Section 5(c)), and also that he “shall
not serve as CEO of the Company or serve as an officer or employee of the
Company or any of its subsidiaries unless and until the Investigation is completed
and the Suitability Committee makes a Clearance Determination in favor of such
service.” (Section 5(d)) As discussed below, because the Suitability Committee
could not and did not, consistent with its fiduciary duties, make any Clearance
Determination in Mr. Charney’s favor, he “shall not serve as CEO of the Company
or serve as an officer or employee of the Company.” There is no time restriction
on this contractual term.
E.

Mr. Charney Again Attempts To Take Back Control Of The Company,
And In Doing So Breaches Various Sections Of The Standstill
Agreement.
45.

In December 2014, after a nearly six month, in-depth

investigation, a unanimous Suitability Committee determined that Mr. Charney
was not suitable to return to the Company in any corporate capacity. American

18

 Apparel also announced that Mr. Charney had been terminated for cause in
accordance with his employment agreement.
46.

The reasons included:

(a) Mr. Charney’s conduct with respect to the “Impersonation
Blogs” involving posting naked photographs of former American Apparel
employees and models in retaliation for claims against him;3
(b) Mr. Charney’s overlapping sexual liaisons with numerous
current and former American Apparel employees and models;
(c) Mr. Charney’s verbal and physical assaults on American
Apparel employees;
(d) Mr. Charney’s efforts to delete, remove, hide or destroy
evidence relating to his actions and misconduct;
(e) Mr. Charney’s use of electronic storage media belonging
to the Company for personal purposes to graphically document his liaisons with
current and former American Apparel employees and models;
(f) Mr. Charney’s repeated practice of causing the Company
to make unauthorized loans and advances to him;
(g) Mr. Charney’s unauthorized use of Company funds to pay
personal expenses, including, without limitation, his personal attorneys’ fees, and
to make personal investments; and
(h) Mr. Charney’s practice of removing cash from Company
retail stores (either personally or at his direction).
47.

However, just as he did after his initial suspension as CEO, Mr.

Charney defiantly refused to accept the outcome of the Suitability Committee’s
3

See, e.g., http://jezebel.com/5796480/dov-charney-sued-again-by-alleged-victims;
http://gawker.com/all-the-reasons-american-apparel-booted-dov-charney1594568282; http://en.wikipedia.org/wiki/Dov_Charney.

19

 investigation and termination decision, notwithstanding that he agreed to that very
process when he entered into the Standstill Agreement.
48.

Since his termination, and despite voluntarily entering into the

Standstill Agreement with the advice of counsel, Mr. Charney has again
undertaken to take over American Apparel by inundating the Company with
litigation seeking, among other things, to remove the Company’s current directors;
making disparaging comments about the current Board and management in the
press; inciting labor unrest within the Company (which fundamentally just serves
as a vehicle for his initiative to return to the Company); and interfering with the
Company’s day-to-day operations.
49.

The motive for this conduct is clear: Mr. Charney himself

remarked in a recent 20/20 interview that he has been “re-strategizing how [he]
want[s] to take back the Company again,” and believes he is “gonna get it back”
through these concerted efforts. (http://abc.go.com/shows/2020/listing/201503/27-2020-032715-occupational-hazards) Mr. Charney has undertaken each of
these actions in breach of the provisions of the Standstill Agreement. These efforts
appear to be part of Mr. Charney’s plan to distract management and interfere with
the Company’s operations.

20

 1. Mr. Charney’s Participation In The Filing Of Various Lawsuits Violates The
Terms Of The Standstill Agreement.
50.

Mr. Charney’s participation in various lawsuits brought against

the Company constitutes a breach of multiple provisions of the Standstill
Agreement.
51.

For example, Sections 3(c) and 3(h) of the Standstill Agreement

prohibit Mr. Charney from instigating, encouraging, joining, acting in concert with
or assisting any third party in seeking to remove directors of the Company. Since
his termination, Mr. Charney has launched a legal campaign in which he and his
confidants have inappropriately requested various courts to do that which Mr.
Charney himself may not do because of the Standstill Agreement – wrest control of
the Company away from the Board and management and reinstate himself as CEO
and a director.
52.

Specifically, since entering into the Standstill Agreement, Mr.

Charney has “instigate[d], encourage[d], joine[d], act[ed] in concert with or
assist[ed]” a stockholder complaint seeking the invalidation of the Company’s
2014 annual meeting that preceded Mr. Charney’s suspension. See Hubner, et al. v.
Mayer, et al., Case No. 15-2965 (C.D. Cal.) (the “Hubner California Action”). In
addition, another of Mr. Charney’s friends filed a remarkably similar lawsuit
seeking the same relief in the Court of Chancery. See Rodriguez v. Mayer, et al.,

21

 C.A. No. 10944-CB (Del. Ch.). Mr. Charney has also sued Standard General4 and
American Apparel5 for defamation, and his lawyer, Keith Fink,6 has filed a labor
class action complaint in the Central District of California7 and a lawsuit alleging
discrimination and wrongful termination in California Superior Court.8 Indeed, Mr.
Fink in quick succession has filed no fewer than twelve National Labor Relations
Board unfair labor practice charges against the Company. In addition, Mr. Fink
relentlessly continues to solicit current and former employees to file additional
charges against the Company.
53.

On April 21, 2015, plaintiffs Jan Willem Hubner, a former

American Apparel employee and long-time supporter of Mr. Charney, and Eric
Ribner, Mr. Charney’s college roommate, filed suit in the Central District of
4

Charney v. Standard General, L.P., et al., Case No. BC 581130 (Cal. Super.).

5

Charney v. American Apparel, Inc. et al., Case No. BC 581602 (Cal. Super.).

6

Although he now works for Mr. Charney, Mr. Fink has actually sued Mr.
Charney for sexual harassment in previous litigation. Unsurprisingly, one article
describing that litigation noted that “Fink’s modus operandi is to embarrass his
targets through scandal.” (http://www.finksteinberg.com/index.php/presscenter/41-media/107-american-apparel-los-angeles-business-journal) Since joining
ranks with Mr. Charney, Mr. Fink continues to implement this strategy against
American Apparel. It should also be noted that Mr. Charney hired Mr. Fink to
represent the Company previously in connection with an EEOC matter, giving rise
to conflict issues as well.
7

Hirschberg, et al. v. American Apparel, Inc., Case No. 2:15-cv-02827-BRO-JPR
(C.D. Cal.).

8

Nisembaum v. American Apparel, Inc., et al., Case No. BC 579342 (Cal. Super.).

22

 California, seeking, among other things, to remove current American Apparel
directors from the Board, to invalidate the results of American Apparel’s 2014
election of directors, to hold a revote of the 2014 annual meeting, and to provide an
opportunity for opposing slates of directors to seek election at the revote.
54.

In connection with plaintiffs’ motion for a preliminary

injunction in the Hubner California Action, Mr. Charney himself submitted a
declaration in support of plaintiffs’ motion seeking removal of two current
directors. This action was designed to “instigate, encourage, join, act in concert
with or assist” his compatriots in removing directors of American Apparel in
violation of the Standstill Agreement.
55.

Three days later, on April 24, 2015, Eliana Gil Rodriguez, a

woman with whom Mr. Charney has had a relationship, filed suit in the Court of
Chancery, seeking substantially similar relief (the “Delaware Action”).
56.

Based on his longstanding relationships with the plaintiffs in

both the Hubner California Action and Delaware Action, it is reasonable to infer
that Mr. Charney is orchestrating these lawsuits behind the scenes in breach of
Sections 3(c) and 3(h) of the Standstill Agreement, which prevent Mr. Charney
from seeking or instigating, encouraging, joining, acting in concert with or
assisting a third party in seeking to remove directors of the Company. Indeed, Mr.
Charney’s submission of a declaration in support of plaintiffs’ motion for
23

 preliminary injunction in the Hubner California Action itself demonstrates his
encouragement and assistance in connection with that litigation, and is a clear
violation of Sections 3(c) and 3(h) of the Standstill Agreement.
57.

In addition, on April 29, 2014, American Apparel employee

Stephanie Santos sent an email from her Company email account “on behalf of
shareholders Jan Willem Hubner and Eric Riber” to other American Apparel
employees describing the Hubner California Action, indicating that the litigation’s
“outcome could dramatically alter the composition of the board of directors . . . .”
American Apparel’s Chief Information Officer traced the origin of this email to
Mr. Charney’s home address. Thus, it is reasonable to infer that Mr. Charney,
either himself or acting through an employee visiting his home, breached Sections
3(c) and 3(h) of the Standstill Agreement by sending an email promoting the
Hubner California Action, the purpose of which is to remove American Apparel
directors elected at the 2014 annual meeting.
2. Mr. Charney’s Participation In And Statements At Employee Meetings
Breached The Terms Of The Standstill Agreement.
58.

Mr. Charney’s participation in, and statements at, recent

employee meetings held by American Apparel workers also violated the terms of
the Standstill Agreement.
59.

The Standstill Agreement, as discussed above, makes clear that

Mr. Charney may never return to the Company as a director or officer.
24

 60.

In addition, Section 3(a)(ii) prohibits Mr. Charney from

“encourag[ing] any other person to solicit or withhold any proxy, consent or other
authority with respect to any shares of Common Stock or otherwise advise,
encourage or influence any other person with respect to voting any shares of
Common Stock . . . .”
61.

Mr. Charney has recently garnered media attention by

participating in employee meetings where he has expressed anti-Board sentiments
and where he appears to be advocating for his return to the Company, which the
Standstill Agreement prohibits. Thus, by participating at these meetings, Mr.
Charney is either seeking support for a return to the Company as an officer or
encouraging American Apparel workers to support the removal of current Board
members. Either way, Mr. Charney, through such actions, violates the Standstill
Agreement.
62.

Indeed, Mr. Charney’s participation in the meeting caused

American Apparel employee Esmeralda Morales to state in a May 11, 2015 email
to American Apparel employees that “[w]e want Dov back,” an indication that Mr.
Charney has used the employee meetings to advocate for his return to the
Company, notwithstanding the Standstill Agreement’s prohibitions.
63.

In addition, shortly before another employee meeting, a labor

group circulated a letter to American Apparel employees informing them that “Dov
25

 is fighting in the courts to regain control of the company that was taken from him
illegally. . . .” Accordingly, it is again reasonable to infer from this letter that Mr.
Charney has used these employee meetings to advocate for his return to the
Company, whether as an officer or Board member, and to rally employee
stockholders to replace current members of the Board. The Standstill Agreement,
however, expressly prohibits this behavior.
64.

Moreover, the same group has recently circulated a flyer

claiming that “Dov Charney will soon return to head the Company,” and
encouraging American Apparel employees to sign a card to support his return.
That flyer also states:
On June 1st there will be a hearing in the California State Court in Los
Angeles to request an injunction by a judge against the American Apparel
Board of Directors to prevent them from conducting the next board meeting
in June due to their alleged corruption and fraud committed against the
shareholders, including the largest shareholder, Dov. We, employees of the
company who received shares due to the generosity of Dov, are minority
shareholders who are victims of fraud and corruptions by the Directors. . . .
You may attend the court hearing and hear for yourself the accusations and
evidence against these Directors and the current management.
This flyer makes clear that Mr. Charney’s participation in employee meetings and
his encouragement and assistance in the Hubner California Action seeking to
remove directors is part of a larger scheme to remove directors from the Board,
influence the results of the 2015 annual meeting, and attempt to reclaim his prior
positions at the Company. This constitutes a violation of the Standstill Agreement.
26

 3. Mr. Charney’s Actions In Connection With A Potential Indication Of Interest
Breached The Terms Of The Standstill Agreement.
65.

Upon information and belief, Mr. Charney has also breached

the terms of the Standstill Agreement in connection with an indication of interest
presented to the Company.
66.

Section 3(e) of the Standstill Agreement prohibits Mr. Charney

from “publicly propos[ing] or participat[ing] in . . . any extraordinary corporate
transaction,” and Section 3(f) of the Standstill Agreement prohibits Mr. Charney
from “purchas[ing] or caus[ing] to be purchased . . . any shares of Common Stock”
of American Apparel.
67.

Bloomberg reported in a December 18, 2014 article published

shortly after Mr. Charney’s termination that:
American Apparel Inc. founder Dov Charney, who was fired by the
company this week, is working with private-equity firm Irving Place Capital
on a bid to acquire the retailer, according to a person familiar with the
situation.
(http://www.bloomberg.com/news/articles/2014-12-19/american-apparel-said-todraw-bid-from-firm-working-with-ex-ceo)
68.

Bloomberg further reported that “[i]f Irving Place can reach a

deal, it would lead to the 45-year-old Charney returning to the company in some
capacity . . . .”

27

 69.

In addition, fashion publication Fashionista stated in a

December 19, 2014 article that:
Just days after Dov Charney was finally, officially, fired from the company
he founded, reports have emerged that he’s angling to take American
Apparel back. According to Bloomberg, Charney is now working with the
private equity firm Irving Place Capital on a bid to acquire the hipster-wear
retailer.
(http://fashionista.com/2014/12/dov-charney-trying-to-acquire-american-apparel)
70.

Fashionista further indicated that “it would be surprising if [Mr.

Charney] let go of the company without a fight.”
71.

Upon information and belief, Mr. Charney also apparently

retained legal and financial advisors during the standstill period to assist him with
potential corporate transactions.
72.

Mr. Charney’s actions, described above, constitute a violation

of Sections 3(e) and 3(f) of the Standstill Agreement.
4. Mr. Charney’s Statements To The Press And To Employees Breached The
Terms Of The Standstill Agreement.
73.

Section 6(b) of the Standstill Agreement prohibits Mr. Charney

from making any statement “that disparages or otherwise negatively reflects upon
the Company, its employees, officers or directors or any person who has served as
an employee, officer or director of the Company in the past, or who serves on or
following the date of this Agreement as an employee, officer or director of the
Company . . . .”
28

 74.

Mr. Charney has recently made multiple statements to the press

designed to disparage the Company and encourage or influence voters in breach of
the terms of the Standstill Agreement.
75.

For example, Mr. Charney has stated to news reporters that

“[t]he company is not managing a turnaround,” but that “[i]t is managing a severe
decline in sales that has taken place under the stewardship of a hedge fund.”
(http://www.buzzfeed.com/sapna/internal-american-apparel-data-shows-salesslumping)
76.

Mr. Charney has also indicated to the LA Times that “[w]hat

we have seen thus far is indicative of leadership that lacks respect for its
workforce,” and that “[a] company that treated its manufacturing workforce with
dignity is now one where workers are viewed as expendable and not as highly
skilled workers that constitute the financial and spiritual backbone of the
company.” (http://www.latimes.com/business/la-fi-american-apparel-layoffs20150402-story.html)
77.

Further, in a transcribed telephone interview with LA Weekly,

Mr. Charney stated:
The company is not managing a turnaround. It is managing a severe decline
in sales that has taken place under the stewardship of a hedge fund. . . . The
bottom line is the company is facing a sales crisis that began after my
ousting and the ousting or departure of dozens of my colleagues.

29

 (http://www.laweekly.com/news/american-apparel-workers-defect-as-layoffs-hitthe-hipster-clothing-firm-5471501)
78.

This false characterization and derogatory comparison of the

Company with Mr. Charney’s old regime violates the non-disparagement
provisions of the Standstill Agreement. These statements are designed to
undermine the Company’s new management and mislead the public into believing
that only Mr. Charney is capable of properly running the Company, when in fact
current management is working tirelessly to execute on its current turnaround plan
necessitated by the harm that occurred under Mr. Charney’s tenure.
79.

In addition, the LA Times quoted Mr. Charney as telling more

than 200 employees at a meeting that current American Apparel leadership has
“created an environment of fear, intimidation and desperation among employees;”
that “I won’t give up until the company is safe;” and that “I’m committed to you
for life.” (http://www.latimes.com/business/la-fi-american-apparel-layoffs20150402-story.html)
80.

These statements are disparaging of the Company and are in

clear violation of Section 6(b) of the Standstill Agreement. In fact, each of the
statements to or reported by media sources referenced above constitutes a breach
of the non-disparagement clause in Section 6(b) of the Standstill Agreement.

30

 F.

Mr. Charney’s Attempts To Manage And Control The Company Are A
Breach Of The Implied Covenant Of Good Faith And Fair Dealing.
81.

In addition to Mr. Charney’s obvious breaches of the Standstill

Agreement, it is clear that Mr. Charney is also trampling on the spirit of the
standstill and other provisions he agreed to in the Standstill Agreement. Mr.
Charney’s attempts to manage, influence or control the Company unfairly deprive
American Apparel of the fruits of its bargain in the Standstill Agreement, and are a
breach of the implied covenant of good faith and fair dealing inherent in every
contract.
82.

The parties entered into the Standstill Agreement to prohibit Mr.

Charney from attempting to take over and control the Company. For example,
Section 1(c) of the Standstill Agreement prohibits Mr. Charney from serving as a
member of the American Apparel Board. In addition, Section 5(d) of the Standstill
Agreement provides that “Charney shall not serve as CEO of the Company or
serve as an officer or employee of the Company or any of its subsidiaries unless
and until the Investigation is completed and the Suitability Committee makes a
Clearance Determination in favor of such service.” (emphasis added) Pursuant to
the Standstill Agreement, the Suitability Committee oversaw an extensive
investigation conducted by FTI Consulting, Inc., and determined that Mr. Charney
was not suitable to serve as CEO of American Apparel. Therefore, Mr. Charney is,
by virtue of the Standstill Agreement, barred from this position. Nonetheless, Mr.
31

 Charney continues to attempt to conduct Company business as if he were still its
CEO or otherwise affiliated with the Company. To the extent his actions are not
an express violation of the Standstill Agreement, he is clearly defying the spirit of
the agreement.
83.

For example, Mr. Charney has insisted on trespassing on

Company property, disrupting its business operations, contacting current
employees with instructions on how to handle day-to-day business matters as if he
still runs the Company, and threatening employees with termination “when he
returns” if they defy his orders.
84.

By virtue of the Standstill Agreement and the Suitability

Committee’s determination, Mr. Charney no longer has any title or role at the
Company other than as a stockholder. Mr. Charney refuses to accept that result or
to take responsibility for his misconduct, and his insistence on attempting to
manage Company employees is a breach of the implied covenant of good faith and
fair dealing, which is inherent in every contract, including the Standstill Agreement.
85.

By limiting Mr. Charney’s ability to acquire more shares, or

encourage others to buy shares, and removing him as a director, the Company
sought through the Standstill Agreement to prohibit Mr. Charney from interfering
with the Company’s ongoing operations. Mr. Charney’s attempt to manage the

32

 Company deprives the Company of the benefit of its bargain and is therefore a
breach of the implied covenant of good faith and fair dealing.
G.

The Company Has Been Harmed By These Breaches.
86.

Mr. Charney has harmed the Company by attempting to

interfere with its relationships with investors and vendors, and also by interfering
with the Board’s obligation to manage the business and affairs of the Company.
The Standstill Agreement was designed to prevent exactly that type of interference,
whether with investors and vendors or the Board’s ability to manage the affairs of
the Company.
87.

Mr. Charney agreed in the Standstill Agreement that such harm

is irreparable, for which money damages would not provide an adequate remedy.
Specifically, Section 11 provides:
The parties acknowledge and agree that if for any reason any of the
provisions of this Agreement are not performed in accordance with their
specific terms or are otherwise breached, immediate and irreparable harm
or injury would be caused for which money damages would not be an
adequate remedy. Accordingly, each party agrees that in addition to other
remedies the other party shall be entitled to at law or equity, the other party
shall be entitled to seek an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions of this
Agreement exclusively in the Court of Chancery or other federal or state
courts of the State of Delaware.
(emphasis added)

33

 COUNT I: BREACH OF CONTRACT
88.

The Company repeats, realleges and incorporates by reference

the allegations in the preceding paragraphs of this Complaint as if fully set forth
herein.
89.

The Standstill Agreement is a valid and binding agreement.

90.

Mr. Charney has breached numerous provisions of the

Standstill Agreement as described above, including by, among other things,
seeking the removal of members of the Board elected at the Company’s 2014
annual meeting or by instigating, encouraging, joining, acting in concert with and
assisting third parties seeking such removal, and by disparaging the Company by
making negative comments about the Company at employee meetings and to the
media.
91.

The Company has been and continues to be irreparably harmed

by Mr. Charney’s breaches of the Standstill Agreement.
92.

Accordingly, the Company is entitled to specific performance

of the Standstill Agreement and an injunction prohibiting Mr. Charney from
continuing to violate the terms of the Standstill Agreement.
93.

The Company has no adequate remedy at law.

34

 COUNT II: BREACH OF THE IMPLIED COVENANT OF GOOD FAITH
AND FAIR DEALING
94.

The Company repeats, realleges and incorporates by reference

the allegations in the preceding paragraphs of this Complaint as if fully set forth
herein.
95.

The implied covenant of good faith and fair dealing is inherent

in every contract and prohibits acts by one party that deprive another of the fruits
of the bargain.
96.

American Apparel bargained for a “standstill” agreement,

which would prevent Mr. Charney from taking over the Company by acquiring
additional shares in the Company, participating in management of the Company,
disrupting the Company, and disparaging the Company.
97.

Mr. Charney has breached the implied covenant of good faith

and fair dealing by his attempts to manage, influence or control the Company, even
though he is no longer a Board member, officer or employee, and by his other acts
to disrupt and disparage the Company.
98.

These actions unfairly deprive the Company of the benefit of its

bargain and therefore breach the implied covenant of good faith and fair dealing.
99.

The Company has been harmed by these actions.

100. The Company has no adequate remedy at law.

35

 REQUEST FOR RELIEF
WHEREFORE, American Apparel respectfully requests that this Court:
(a)

enter a judgment in its favor on Counts I and II of this Complaint;

(b)

enter an order of specific performance requiring Mr. Charney to
comply with the provisions of the Standstill Agreement, and
injunctive relief prohibiting Mr. Charney from continuing to breach or
further breaching the terms of the Standstill Agreement; and

(c)

grant American Apparel such other and further relief as the Court
deems just and proper, including the costs and reimbursements of this
action and reasonable attorneys’ fees.

OF COUNSEL:
Peter B. Morrison
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
300 South Grand Avenue
Suite 3400
Los Angeles, California 90071

/s/ Edward B. Micheletti
Edward B. Micheletti (ID No. 3794)
Jenness E. Parker (ID No. 4659)
Matthew P. Majarian (ID No. 5696)
Bonnie W. David (ID No. 5964)
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899-0636
Tel.: (302) 651-3000
Fax: (302) 651-3001
Attorneys for Plaintiff
American Apparel, Inc.

DATED: May 15, 2015

36