Back in 2015, the board of retailer American Apparel informed the company’s controversial founder, Dov Charney, that it was ousting him from his roles as chairman and CEO. For years, Charney had fended off sexual-harassment lawsuits and rumors of inappropriate behavior. But only when the company’s creditors grew anxious about its long-term liability did the board decide to take action, citing new and damning revelations, as reported by Elizabeth A. Harris in the New York Times.
As the saga continued to unfold, it highlighted several dimensions of negotiation that managers and executives would be wise to heed—including the importance of continually assessing your BATNA, or best alternative to a negotiated agreement.
The Downside of Mandatory Arbitration
Charney reportedly faced a slew of sexual-harassment and discrimination lawsuits over the past decade. The board’s seemingly willful obliviousness to this turbulence may have been encouraged by a policy at American Apparel requiring all employees to sign mandatory arbitration agreements and some to sign documents waiving their right to make any claim against the company, write Harris and Steven Greenhouse in the Times.
Unlike court trials, arbitration hearings are generally closed proceedings. Moreover, when settling charges, Charney and his lawyers insisted that plaintiffs agree not to disclose any details about the case, the ruling, and any payout.
This changed, however, when the board learned that an arbitrator had found Charney guilty of defamation for failing to halt the online publication of naked photographs of a former American American employee. The news led the board to quietly conduct an investigation of Charney.
Negotiating a Boardroom Coup
On June 17, 2015, the night before American Apparel’s scheduled annual board meeting, four board members met in a private dining room in New York to plan Charney’s ouster. Expecting Charney to fight hard for the company he had founded back in 1998, they discussed how his dismissal might unfold.
At the meeting, the board gave Charney an ultimatum: relinquish his 27% stake in the company in exchange for a multimillion-dollar severance and four-year consulting contract or be fired for misconduct, Bloomberg BusinessWeek reports. The board accused Charney of violating the company’s sexual-harassment policy and misusing company funds in various ways, including paying off former employees to avoid personal lawsuits.
Charney vociferously rejected both options, insisting that the business was turning around and that the charges were outdated and insufficient grounds for termination. The board issued a press release announcing Charney’s ouster, his firing within 30 days, and the appointment of a new CEO and board co-chairman.
Charney Fights Back
After the meeting, Charney swung into action, determined to find a way to win back his company. He quickly worked out a deal with Standard General, a New York hedge fund that began buying up American Apparel stock.
By partnering with Standard General, Charney increased his ownership stake in American Apparel from 27% to 43%. He was seeking the support of about 7% of the company’s shareholders to claw his way back into control. He hoped to expand the company’s board from six to 15 members, a change that would give him the majority of the board’s support.
In response, American Apparel’s board issued a “poison pill” aimed at deterring a takeover by preventing Charney and other significant shareholders from increasing their stake by even one percent or risk flooding the market with cheap shares, according to the Times. Lawsuits, and not negotiation, were the next stage in the game.
The mess at American Apparel serves as a reminder of the risks of turning a blind eye to unethical, volatile, and even illegal behavior at the office. By waiting too long to address Charney’s allegedly abusive and chaotic management style, and by tolerating an arbitration policy that kept them largely in the dark, the company’s board set itself up for a long standing battle that could harm all parties that have a stake in the company’s success, from employees to shareholders.
A year later, American Apparel filed its second Chapter 11 and in 2017, Canadian Gildan Activewear paid $88 million to acquire intellectual property assets and inventory from American Apparel. This includes the opportunity to maintain some or all of American Apparel’s production and distribution operations in Los Angeles, writes USA Today.
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