Lion Capital, the investment firm that formerly backed American Apparel Inc., urged the clothing chain to consider strategic alternatives such as a sale of the company, a person with knowledge of the matter said.

American Apparel received a letter from Lion on Sunday asking the retailer to form a special committee to review its options, said the person, who asked not to be identified because the matter is private. Lion also said it plans to name founding partner Lyndon Lea to American Apparel’s board instead of previous nominee Gene Montesano, one of the entrepreneurs behind Lucky Brand Jeans, the person said.

The move adds pressure to a company already reeling from an acrimonious split with Dov Charney, its founder and former chief executive officer. Lion has been a longtime ally of the controversial Charney, who is trying to reassert his influence at the retail chain after he was fired this month.

Lion, which already has another director at American Apparel, has the power to appoint board members under an earlier financing agreement. The Wall Street Journal previously reported on the letter, citing unidentified people.

Charney, 45, is working with private-equity firm Irving Place Capital on a deal to buy American Apparel that would involve the executive returning to American Apparel in some capacity, a person with knowledge of the matter said earlier. American Apparel’s board confirmed last week it received a takeover proposal for as much as $1.40 a share, though it said it remains focused on turning the company around.

The board views the bid as significantly too low for a retailer on the verge of a comeback, one of the person said. No other bidders have emerged, and the board is unlikely to form a special committee on the basis of the offer supported by Charney, the person said.

American Apparel, based in Los Angeles, declined to comment. Lion didn’t respond to a request for comment.

Shares of the clothing chain rose 1.9 percent to $1.08 at the close today in New York. The stock had surged 84 percent during the previous two weeks, fueled by takeover speculation, though it remains down for the year.

Lion was an investor in American Apparel from 2009 to 2013 and more recently provided credit to the retailer. As part of a rescue deal earlier this year, investment firm Standard General bought out a $10 million loan that Lion had made to American Apparel.

The retailer has racked up more than $300 million in net losses since 2010, forcing it to raise money to make ends meet. Its most recent infusion came in July, when it received a capital commitment of $25 million from Standard General.

American Apparel formally fired Charney on Dec. 16 after a six-month suspension. In removing its leader, the board cited allegations of misconduct, including sexual-harassment policy violations and misuse of corporate funds. Charney’s lawyer has called the allegations “baseless.”

He remains American Apparel’s largest shareholder, with a 43 percent stake. However, he shares the voting rights on the stock with Standard General -- part of a deal that he forged with the firm to build up his holdings.

After terminating Charney, the company named retail veteran Paula Schneider as its next CEO. She will take the job on Jan. 5. Charney has said that he’s friends with Schneider and championed her for the job, signaling that he isn’t trying to take back the CEO role for himself.

The board also said last week that it adopted a shareholder rights plan to prevent a person or group from accumulating more than 10 percent of the stock. However, the plan isn’t meant to protect against offers for all of the company, the retailer said.


--With assistance from Matthew Monks in New York.

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