jan willem hubner & eric ribner vs. allan mayer, david danziger, robert greene, marvin ingelman,...

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Patrice L. Bishop (182256) [email protected] STULL, STULL & BRODY 9430 West Olympic Boulevard Suite 400 Beverly Hills, CA 90212 Tel: (310) 209-2468 Fax: (310) 209-2087 Michael J. Klein (admitted pro hac vice) [email protected] Stull, Stull & Brody 6 East 45th Street New York, NY 10017 Tel: (212) 687-7230 Fax: (212) 490-2022 Counsel for Plaintiffs

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION JAN WILLEM HUBNER and ERIC RIBNER, Plaintiffs, v. ALLAN MAYER, DAVID DANZIGER, ROBERT GREENE, MARVIN IGELMAN, WILLIAM MAUER, AND AMERICAN APPAREL, INC., Defendants.

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Case No. 2:15-cv-02965-MWF (JEMx) [CORRECTED] MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF MOTION FOR PRELIMINARY INJUNCTION Date: June 1, 2015 Time: 10:00 a.m. Judge: Hon. Michael W. Fitzgerald Ctrm: 1600-16th Floor, Spring St.

Case 2:15-cv-02965-MWF-JEM Document 15 Filed 05/01/15 Page 1 of 28 Page ID #:183

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TABLE OF CONTENTS

I. INTRODUCTION ............................................................................................. 1II. STATEMENT OF FACTS ................................................................................ 2III. ARGUMENT .................................................................................................... 6

A. Standard for Granting Preliminary Injunction ........................................ 6B. Plaintiffs are Likely to Succeed on Their Exchange Act Claims ........... 7

1. The Proxy Statement Contained Material Misrepresentations and Omissions ..................................................................................... 8

2. The Proxy Statements Material Misrepresentations and Omissions Caused the Plaintiff Injury ........................................ 13

3. The Solicitation Material was an Essential Link in Ousting Charney from the Company ....................................................... 15

C. Plaintiffs are Likely to Succeed on Their Claims for Breach of the Duty of Candor/Disclosure ............................................................................ 171. The Individual Defendants did not Disclose Fully and Fairly all

Material Information within its Control While Seeking

Shareholder Action ..................................................................... 172. The Undisclosed Information Was Material .............................. 18

D. Plaintiffs are Likely to Suffer Irreparable Harm Absent Preliminary Relief ..................................................................................................... 18

E. The Balance of Equities Sharply Favors Plaintiffs ............................... 21F. Plaintiffs Seek Narrowly Tailored Relief Which will Serve the Public

Interest ................................................................................................... 23IV. CONCLUSION ............................................................................................... 24


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TABLE OF AUTHORITIES

CasesAllergan, Inc. v. Valeant Pharms. Intl, Inc., SACV 14-1214 DOC(ANx),

2014 U.S. Dist. LEXIS 156227 (C.D. Cal. Nov. 4, 2014) .............................. 19, 23

Bender v. Jordan, 439 F. Supp. 2d 139 (D.D.C. 2006) ....................................... 20, 21

Berkman v. Rust Craft Greeting Cards, Inc., 454 F. Supp. 787 (S.D.N.Y.

1978) ...................................................................................................................... 17

Blasius Indus., Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651 (1988) .................... 18, 21

Burks v. Lasker, 441 U.S. 471 (1979) ....................................................................... 16

Calamore v. Juniper Networks Inc., 364 Fed. Appx. 370 (9th Cir. Cal. 2010) ........ 20

Dent v. Ramtron Intl Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110 (Del.

Ch. June 30, 2014) ................................................................................................. 17

Desaigoudar v. Meyercord, 223 F.3d 1020 (9th Cir. Cal. 2000) .............................. 13

Dupont v. Wyly, 61 F.R.D. 615 (D. Del. 1973) ................................................... 14, 15

Durham v. County of Maui, 08-00342 JMS/RLP, 2011 U.S. Dist. LEXIS

72068 (D. Haw. June 23, 2011) ............................................................................. 10

EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429 (Del. 2012) ........................................ 14

Gilder v. PGA Tour, Inc., 936 F.2d 417 (9th Cir. 1991) ............................................. 7

Gladwin v. Medfield Corp., No. 74-169 Civ. (TH), 1975 U.S. Dist. LEXIS

14080 (M.D. Fla. 1975) ........................................................................................... 8

In Re Anderson, Clayton Litigation, Del. Ch., 519 A.2d 669 (1986) ........................ 18

In re Bay Area Material Handling, No. 94-15815, 1996 U.S. App. LEXIS

2272 (9th Cir. Jan. 25, 1996) ................................................................................. 10

In re FoxHollow Techs., Inc., No. C 06-4595 PJH, 2008 U.S. Dist. LEXIS

52363 (N.D. Cal. May 27, 2008) ........................................................................... 16

In re J.P. Morgan Chase & Co. Sholder Litig., 906 A.2d 808 (Del. Ch. 2005),

affd, 906 A.2d 766 (Del. 2006) ............................................................................ 20

In re MONY Group Inc. Sholder Litig., 853 A.2d 661 (Del. Ch. 2004) .................. 22


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Issen v. GSC Enterprises, Inc., 522 F. Supp. 390 (N.D. Ill. 1981) ........................... 15

J.I. Case Co. v. Borak, 377 U.S. 426 (1964) ................................................. 13, 15, 21

Jewelcor, Inc. v. Pearlman, 397 F. Supp. 221 (S.D.N.Y. 1975) ............................... 16

Lane v. Page, 581 F. Supp. 2d 1094 (D.N.M. 2008) ........................................... 12, 16

Lewis v. Leaseway Transp. Corp., No. 8720, 1990 Del. Ch. LEXIS 69 (Del.

Ch. May 16, 1990) ................................................................................................. 18

Mills v. Elec. Auto-Lite Co., 396 U.S. 375 (1970) .................................... 8, 14, 20, 23

MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118 (Del. 2003) ..................................... 14

Mony Group, Inc. v. Highfields Capital Mgmt., L.P., 368 F.3d 138 (2d Cir.

2004) ...................................................................................................................... 18

New York City Emples. Ret. Sys. v. Jobs, 593 F.3d 1018 (9th Cir. Cal. 2010) .......... 7

OTR Wheel Engg, Inc. v. West Worldwide Servs., No. 14-35563, 2015 U.S.

App. LEXIS 4384 (9th Cir. Mar. 18, 2015) ........................................................ 6, 7

Polaroid Corp. v. Disney, 862 F.2d 987 (3d Cir. 1988) ............................................ 19

SEC v. Keating, CV 91-6785 (SVW), 1992 U.S. Dist. LEXIS 14630 (C.D.

Cal. July 23, 1992) ................................................................................................. 16

St. Louis Police Ret. Sys. v. Severson, No.: 12-CV-5086 YGR, 2012 U.S. Dist.

LEXIS 152392 (N.D. Cal. Oct. 23, 2012) ............................................................. 19

Totten v. Merkle, 137 F.3d 1172 (9th Cir. 1998) ....................................................... 10

TSC Indus. v. Northway, 426 U.S. 438 (1976) ............................................................ 8

Statutes15 U.S.C. 78n ................................................................................................... passim

RulesFederal Rule of Evidence 801 ............................................................................... 9, 10

Regulations17 C.F.R. 240.14a-9 .................................................................................. 2, 7, 13, 16


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Plaintiffs Jan Willem Hubner and Eric Ribner (Plaintiffs) hereby submit this

Memorandum of Points and Authorities in support of their Motion for Preliminary

Injunction (the Motion).

I. INTRODUCTION This is a straightforward case and this Motion presents one issue: Were

Defendants actions of June 18, 2014, irreconcilable with their solicitations of April

28, 2014 through June 17, 2014, such that Defendants disenfranchised the record

holders entitled to vote at the 2014 Annual Meeting?

As more fully detailed infra and in Plaintiffs Complaint,1 the Board of

Directors (the Board) of Defendant American Apparel, Inc. (American Apparel

or the Company)2 solicited proxies via an April 28, 2014 definitive proxy

statement filed with the Securities and Exchange Commission (SEC) on Form

DEF 14-A (the Proxy Statement).3 Among other things, the Proxy Statement

stated that:

Dov Charney (Charney) continuing to serve as Chairman and CEO following the election of directors was in the best interest of the

Company;

Charney was intimately connected to American Apparels brand identity and was the principal driving force behind American Apparels

core concepts and designs, and;

1 Complaint for Violation of the Federal Securities Laws and Breach of Fiduciary Duty (Dkt. No. 1) (the Complaint), filed on April 21, 2015. All references to __ mean and refer to the Complaint. 2 American Apparel is a Delaware Corporation headquartered in Los Angeles. 3 See Exhibit 1 to the Declaration of Patrice L. Bishop (the Bishop Decl.) filed concurrently herewith. All references to Ex. __ mean and refer to exhibits attached to the Bishop Decl.


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Charneys combined role promoted unified leadership and direction for the Board and executive management and allowed for a single, clear

focus for the Companys operational and strategic efforts.

These representations, among others, were part of continuing representations

that expired sixteen hours before the Companys June 18, 2014 Annual Meeting (the

2014 Annual Meeting) regarding the election of three directors, appointment of

independent auditors, and executive compensation. Immediately after the 2014

Annual Meeting, the Board held a separate meeting (the June 18 Board Meeting),

and within minutes of its start, the Individual Defendants4 told Charney that if he did

not immediately resign he would be terminated for cause.

As more fully outlined below, Defendants admit that the decision to terminate

Charney was not sudden, but well-planned. This admission is irreconcilable with

Defendants statements in the Proxy Statement regarding Charney and his

importance to the Company, and demonstrates that Defendants solicitation of

proxies via the Proxy Statement violated Section 14(a) (Section 14(a)) of the

Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. 78n, Rule 14a-9

promulgated thereunder by the SEC, and the Individual Defendants fiduciary duty

of disclosure/candor.

II. STATEMENT OF FACTS The Proxy Statement was a solicitation by the Board . . . of proxies for use at

the 2014 Annual Meeting to be held on Wednesday, June 18, 2014, at 11:00 a.m.,

Eastern Time, for the purposes set forth in th[e] Proxy Statement and in the

accompanying Notice of Annual Meeting of Stockholders. Ex. 1 at 006. The

Proxy Statement allowed shareholders to vote until 7:00 p.m., Eastern Time, on

June 17, 2014. Ex. 1 at 056. All proxies were revocable until their exercise at the

4 The Individual Defendants are Allan Mayer (Mayer), David Danziger (Danziger), Robert Greene (Greene), Marvin Igelman and William Mauer.


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meeting on Wednesday, June 18, 2014, at 11:00 a.m, Eastern Time, or any

adjournments or postponements thereof[.] Id. Plaintiffs were record holders

(Record Holders) of American Apparels stock on April 21, 2014, the Proxy

Statements record date (the Record Date). See Declaration of Jan Willem Plaintiff

Hubner and Declaration of Plaintiff Eric Ribner, filed concurrently herewith.

Defendants solicitations in the Proxy Statement advised Record Holders that

Charney serves as both our Chief Executive Officer and Chairman of the Board,

[and] leads and provides strategic guidance to the Companys management

team[,which senior management team supervise[s] all aspects of the Companys

business, in particular the design and production of merchandise, the operation of

our stores and our financial reporting function.] Ex. 1 at 024. According to the

Proxy Statement, [t]he Board of Directors has determined that the combination of

these roles held singularly by Mr. Charney is in the best interests of all stockholders

given that Mr. Charney founded the Company, is considered intimately connected to

American Apparels brand identity and is the principal driving force behind

American Apparels core concepts and designs. Id. Defendants also represented

that they had given careful consideration to separating the roles of Chairman of the

Board and [CEO] but determined that Charneys combined role promotes

unified leadership and direction for the Board and executive management and allows

for a single, clear focus for the Companys operational and strategic efforts. Id.

(emphasis added).

Defendants solicitations also advised Record Holders that pursuant to an

employment agreement Charney will serve as the Companys Chief Executive

Officer for a term ending on March 31, 2015 and provided how much Charney

would be paid. Ex. 1 at 042-43. Defendants recommended that Record Holders vote

in favor of Proposal 3, an advisory vote to approve the compensation of Charney

and the Companys other named executive officers, and for the re-election of

Danziger, Greene and Mayer to the Board. Ex. 1 at 056. As the Companys June


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23, 2014 Form 8-K shows, Proposal 3 passed by an overwhelming majority, with

54,774,328 votes for it, 13,458,923 votes against it, 108,190 abstentions, and

41,001,033 Broker non-votes. Ex. 2 at 063.

The Proxy Statement also solicited and recommended shareholders vote, inter

alia, to approve, on an advisory basis, the compensation of Charney and other

named executive officers for the next year, and it informed shareholders that [t]he

Company and Dov Charney are parties to an employment agreement effective as of

April 1, 2012, pursuant to which Mr. Charney will serve as the Companys Chief

Executive Officer for a term ending on March 31, 2015 and that [t]his term will

automatically extend for successive one-year periods unless either party provides

written notice of non-renewal. Ex. 1 at 042.

The only other items of business for the meeting were to ratify the

appointment of the independent auditors and [t]o consider and transact such other

business as may properly come before the Annual Meeting. Ex. 1 at 007. There is

no indication that any such other business came before the 2014 Annual Meeting.

Ex. 2.

Pursuant to the Companys Bylaws, the Board met immediately after and at

the same place as the meeting of the stockholders at which it is elected[,] without

notice having been required. Ex. 3 at 071-72, 3.4. At the June 18 Board meeting,

among other things, the Board: (a) notified Charney of its intent to terminate his

employment for cause under Mr. Charneys employment agreement; (b) removed

Mr. Charney as Chairman of the Board of Directors, effective immediately, and

appointed Allen Mayer and David Danziger as Co-Chairmen of the Board; and (c)

appointed John J. Luttrell (Luttrell) as Interim CEO while having Luttrell stay

Chief Financial Officer (CFO) of the Company and announced that Mr. Luttrells

monthly base salary will be increased from $36,750 to $62,500 for as long as he

serves as Interim [CEO]. Ex. 4 (Each of these details, except for Luttrells salary,

was also included in Ex. 5, the June 18, 2014 press release).


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The Companys June 19, 2014 Form 8-K further: (d) recognized that

Charneys termination may have triggered a default under one credit agreement,

defined as the Lion Facility in the Companys disclosure, which would in turn

trigger a default under another credit agreement, defined as the Capital One

Facility in the disclosure; (e) recognized that the Company was already in the

process of notifying Lyon and Capital One about Charneys suspension, and; (f)

incorporated by reference a news release of June 18, 2014 announcing Charneys

suspension and Luttrells appointment as Interim CEO. Ex. 4.

The press release incorporated by reference into the Companys June 19, 2014

Form 8-K stated, among other things:

We take no joy in this, but the Board felt it was the

right thing to do, Mr. Mayer said. Dov Charney created

American Apparel, but the Company has grown much

larger than any one individual and we are confident that its

greatest days are still ahead.

The Board is working with a search firm to identify

candidates for the job of permanent CEO and, based on our

initial discussions with the search firm, we expect the list

of possible successors will be impressive, said Mr.

Danziger, who has chaired the Boards Audit Committee

since 2011.

We have one of the best known and most relevant

brands in the world, with employees who are second to

none; I believe we have a very exciting future, said Mr.

Luttrell. Our core business-designing, manufacturing, and

selling American-made branded apparel-is strong and

continues to demonstrate great potential for growth, both


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in the U.S. and abroad. This new chapter in the American

Apparel story will be the most exciting one yet.

Ex. 5 at 092 (emphasis added).

The press release was issued no later than 10:32 p.m. on June 18, 2014. Ex. 6

at 098. The Companys June 19, 2014 Form 8-K was accepted by the SEC at

8:41:52 a.m. Ex. 7 at 103. The public revelation that Charney had been terminated

was therefore less than 27 and 38 hours, respectively, after the conclusion of

Defendants solicitation of the Record Holders proxies via statements, among other

things, regarding how the Board carefully considered and determined that Charney

should be Chairman and CEO.

The Individual Defendants also presented Charney with an approximately five

page, single-spaced termination letter and a positive press release which would

have announced that Charney had entered into a consulting agreement with the

Company. See Declaration of Charney (Charney Decl.), filed concurrently

herewith. Had Charney agreed to resign from his positions with the Company,

among other things, the Individual Defendants informed him that they intended to

issue the positive press release on June 18, instead of Ex. 5. Id., see also Exs. 5-6.

III. ARGUMENT A. Standard for Granting Preliminary Injunction There are two ways by which plaintiffs may satisfy the test to receive a

preliminary injunction. First, [a] plaintiff who seeks a preliminary injunction must

show [1] that he is likely to succeed on the merits, [2] that he is likely to suffer

irreparable harm in the absence of preliminary relief, [3] that the balance of equities

tips in his favor, and [4] that an injunction is in the public interest. OTR Wheel

Engg, Inc. v. West Worldwide Servs., No. 14-35563, 2015 U.S. App. LEXIS 4384,

at *2 (9th Cir. Mar. 18, 2015) (citations omitted).

Alternatively, If the balance of equities tips sharply in the plaintiffs favor,

then a court may issue a preliminary injunction upon a showing that there are


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serious questions going to the merits a lesser showing than likelihood of success

on the merits. Id. at *2 (citations omitted). Serious questions are those which

cannot be resolved one way or the other at the hearing on the injunction and as to

which the court perceives a need to preserve the status quo lest one side prevent

resolution of the questions or execution of any judgment by altering the status quo.

Gilder v. PGA Tour, Inc., 936 F.2d 417, 422 (9th Cir. 1991) (quotations and

citations omitted). Serious questions need not promise a certainty of success, nor

even present a probability of success, but must involve a fair chance of success on

the merits. OTR Wheel Engg, Inc., 2015 U.S. App. LEXIS 4384, at *2 (citations

omitted).

As detailed below, Plaintiffs satisfy this standard and the requested

preliminary injunction is appropriate.

B. Plaintiffs are Likely to Succeed on Their Exchange Act Claims Section 14(a) applies to any person who solicit[s] or to permit[s] the use of

his name to solicit any proxy or consent or authorization in respect of any security

with inapplicable exceptions. 15 U.S.C. 78n(a). The Proxy Statement was a

solicitation by the Company and the Board. Ex. 1 at 014, 058. Thus the Defendants

solicited proxies pursuant to Section 14(a).

To state a claim under Section 14(a) and Rule 14a-9 promulgated thereunder,

17 C.F.R. 240.14a-9, a plaintiff must establish that (1) a proxy statement

contained a material misrepresentation or omission which (2) caused the plaintiff

injury and (3) that the proxy solicitation itself, rather than the particular defect in the

solicitation materials, was an essential link in the accomplishment of the

transaction. New York City Emples. Ret. Sys. v. Jobs, 593 F.3d 1018, 1021 (9th

Cir. Cal. 2010) (citations omitted) (revd on other grounds). Plaintiffs can

demonstrate each of these elements.


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1. The Proxy Statement Contained Material Misrepresentations and Omissions

For purposes of proxy fraud, [a]n omitted fact is material if there is a

substantial likelihood that a reasonable shareholder would consider it important in

deciding how to vote. TSC Indus. v. Northway, 426 U.S. 438, 449 (1976). As

described below, the misrepresentations in the Proxy Statement were neither so

trivial, or so unrelated to the transaction for which approval is sought, that correction

of the defect or imposition of liability would not further the interests protected by

14 (a). Mills v. Elec. Auto-Lite Co., 396 U.S. 375, 384 (1970). Defendants

misrepresentations were directly contrary to the exact reasons shareholders vote: to

determine the Companys future path. Moreover, even without Defendants strong

statements regarding Charneys importance to the Company, the Defendants should

have disclosed a known intent to replace the CEO while soliciting proxies for the re-

election of directors. See Gladwin v. Medfield Corp., No. 74-169 Civ. (TH), 1975

U.S. Dist. LEXIS 14080, at *16-17 (M.D. Fla. 1975).

Rather than disclose their true intentions, Defendants solicitations (as

described above) could only have been accurate at the end of the solicitation period

if, during the 27 hours following the solicitation period, Defendants had:

All revisited and changed their carefully considered determination of Charneys importance as both Chairman and CEO, decided that he

should no longer serve as either Chairman or CEO, and decided to

terminate his contract;

Agreed upon who among them would be co-Chairmen of the Board; Determined who should be the Companys interim CEO, and appointed

him;5

5 Additionally, between 10:30 p.m. and 8:30 a.m. Defendants negotiated a compensation agreement with the interim CEO if they had not already done so.


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Had multiple discussions and began working with a search firm to identify candidates for the job of permanent CEO, which discussions

had advanced to the point where Defendants had an expectation that

the list of possible successors will be impressive;

Reviewed the Companys credit agreement and recognized that Charneys termination may have triggered two specific defaults, and

had already began the process of notifying Lyon and Capital One

about Charneys suspension, and;

Issued a press release disclosing the above, which had already presumably been review by counsel before disclosure.

Exs. 4-5.6

As implausible as the above is, the Individual Defendants also presented

Charney with a five page (single spaced) termination letter and a positive press

release announcing that Charney had entered into a consulting agreement with the

Company. The Individual Defendants informed Charney that they were ready to

6 The Companys SEC filings are admissible as business records pursuant to Fed. R. Evid. 803(6). [V]irtually all forms 10-K filed with the SEC are admissible so long as [they are] properly authenticated because they assuredly [were] prepared by people with personal knowledge, at or near the time of the events, who were just doing their ordinary jobs. SEC v. Jasper, 678 F.3d 1116, 1122-23 (9th Cir. Cal. 2012); see also McGhee v. Joutras, No. 94 C 7052, 1996 U.S. Dist. LEXIS 18019 (N.D. Ill. Dec. 4, 1996). SEC filings may be introduced by an opponent as admissions of the party that filed them, see Fed. R. Evid. 801(d)(2), [but] they are hearsay when offered by the party that prepared them. In re Magnesium Corp. of Am., 460 B.R. 360, 377 n.67 (Bankr. S.D.N.Y. 2011); accord Lifescan Scotland, Ltd. v. Shasta Techs., LLC, No.: 5:11-CV-04494 EJD, 2012 U.S. Dist. LEXIS 100549, at *17 n.1 (N.D. Cal. July 19, 2012) (To the extent that Instacare or Pharmatech argue that the statements contained within the SEC reports are hearsay, they are incorrect.)


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issue the positive press release on June 18 if Charney agreed to, among other

things, resign as CEO and Chairman. See Charney Decl.

Yet, hours after soliciting shareholder proxies via a Proxy Statement declaring

that they had given careful consideration to separating the roles of Chairman of the

Board and [CEO] and determined that Charneys combined role promotes

unified leadership and direction for the Board and executive management and allows

for a single, clear focus for the Companys operational and strategic efforts[,] Ex. 1

at 16 (emphasis added), Defendants stated, contrarily, that the Company has grown

much larger than any one individual[.] Ex. 5 at 092. Not only was Charney

stripped of his CEO and Chairman positions, he was excommunicated from the

Company.

Defendants did not suddenly change their minds about Charneys value to the

Company. Their briefing in In re American Apparel, Inc. Shareholder Derivative

Litigation, Lead Case No. 14-CV-5230-MWF (the Related Derivative Action),

functionally admits that they committed proxy fraud and violated their fiduciary

duty of candor in connection with the Proxy Statement.7 Defendants wrote that

[o]n June 18, 2014, the Company suspended Charney, pending completion of an

investigation into alleged recent misconduct. At the conclusion of that investigation,

on December 15, 2014, Charney was terminated for cause. Unlike the process

undertaken by the Company, however, Plaintiffs did not wait for a careful review of

the facts. Exs. 8 at 110, n.1 (joining the Companys motion); 9 at 143:14-16.

7 Briefing filed on Defendants behalf in the Related Derivative Action is generally admissible. See Totten v. Merkle, 137 F.3d 1172, 1176 (9th Cir. 1998). Factual statements made by attorneys fall within the hearsay exception of Fed. R. Evid. 801(d)(2)(C) and (D). In re Bay Area Material Handling, No. 94-15815, 1996 U.S. App. LEXIS 2272, at *7-8 (9th Cir. Jan. 25, 1996); accord Durham v. County of Maui, 08-00342 JMS/RLP, 2011 U.S. Dist. LEXIS 72068, at *45-53 (D. Haw. June 23, 2011) (relevant factual allegations in an amended pleading in a related action were not hearsay and deemed admitted as to plaintiffs).


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Defendants also recognized a crucial distinction between knowledge that

misconduct has been alleged, and knowledge that the allegations are true. The

briefing states that the Board did act when, in its protected business judgment, it

believed it had sufficient information concerning Charney the Board suspended,

investigated, and then terminated Charney. Exs. 8 at 110, n.1; 9 at156:11-12,

157:8-11. The Individual Defendants asserted that they did not, and [n]o

conscientious board would terminate Mr. Charney based merely on allegations[,]

rather the Board had to ensure that sufficient credible information warranted Mr.

Charneys termination[.] Ex. 10 at 170.

Indeed, the Individual Defendants assert that the Board faced complex and

difficult choices with respect to Mr. Charney because [a]ny attempt to remove Mr.

Charney prematurely could have been disruptive to the Companys operations,

including the possibility that Mr. Charney would have used his substantial stock

ownership to interfere with the ongoing investigation into his conduct. Ex. 8 at

111:13-19. It was crucial, therefore, that any decision to terminate Mr. Charney be

grounded in established facts and not simply rumor and innuendo, because Mr.

Charney could have used (and did use) his position to interfere with the investigation

and ultimately challenge his termination. Ex. 8 at 111:21-24

In other words, while it is unclear when Defendants specifically began

seriously considering terminating Charney, the Individual Defendants represented

that their decision was well thought out and considered over a period of time, Ex. 8

at 124,8 and that the Boards considerations included Charneys contributions to the

8 Plaintiffs appear to believe that terminating Mr. Charney was an easy call that the Board should have made much earlier. But plaintiffs own allegations show that the issue was never so simple. There were business, contractual, and procedural complications that militated against terminating Mr. Charney, or taking final action without a sufficient factual record. Weighing these risks against the risks of retaining


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Company. Ex. 8 at 126.9 This lengthy consideration cannot be reconciled with the

concurrent statements made in the Proxy Statement.

The Individual Defendants further stated that [i]t was likely that if he were

terminated, Mr. Charney could seek to influence control of the Board and possibly

interfere with the ongoing investigation of his conduct and that for the derivative

plaintiffs who complained Mr. Charney was fired too late, the prospect of a board

Mr. Charney controlled would have been disastrous. The timing of the Boards

decision to remove Mr. Charney was crucial, and the Board got it right. Ex. 8 at

125:14-21 (emphasis added). However, it is evident that such a large difference

between the actual events after the 2014 Annual Meeting and the Proxys

expression of the directors intent gives rise to a fair inference that either something

occurred to change the minds of several directors between the issuance of the Proxy

and the voting, which would be an event that needed to be disclosed, or else the

directors never intended to [keep Charney in his position] and the Proxy was false

from the start. Lane v. Page, 581 F. Supp. 2d 1094, 1122-23 (D.N.M. 2008) (Just

as directors and officers are not required to divulge their secret motives to

shareholders, so too should plaintiffs not be required to be mind-readers who must

be able to know exactly why something happened, especially at this early stage in

proceedings.)

Mr. Charney as CEO is a quintessential exercise of business judgment that the Board was positioned uniquely to make. Ex. 8 at 124:11-17. 9 Mr. Charney undeniably had made positive contributions to the Company over time. Plaintiffs . . . ignore the fact that Mr. Charney had and continues to have supporters who believe that he has something to contribute to the Company, and stand to lose money if they are wrong.. . . . The Board had to weigh Mr. Charneys potential contributions to the Company against the risks to the Company and its employees of him remaining involved. This was a difficult decision, and plaintiffs have not shown why it must have been made earlier. Ex. 8 at 126:8-18.


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2. The Proxy Statements Material Misrepresentations and Omissions Caused the Plaintiff Injury

As the Supreme Court has held:

The purpose of 14(a) is to prevent management or

others from obtaining authorization for corporate action by

means of deceptive or inadequate disclosure in proxy

solicitation. The section stemmed from the congressional

belief that fair corporate suffrage is an important right

that should attach to every equity security bought on a

public exchange. It was intended to control the

conditions under which proxies may be solicited with a

view to preventing the recurrence of abuses which . . .

[had] frustrated the free exercise of the voting rights of

stockholders. Too often proxies are solicited without

explanation to the stockholder of the real nature of the

questions for which authority to cast his vote is sought.

J.I. Case Co. v. Borak, 377 U.S. 426, 431 (1964) (citations omitted). The Ninth

Circuit has similarly recognized that Section 14(a) and Rule 14a-9 . . . require that

officials divulge all known material facts so that shareholders can make informed

choices. Desaigoudar v. Meyercord, 223 F.3d 1020, 1024 (9th Cir. Cal. 2000).

The right of shareholders to make informed choices is reflected by Delaware

law, which recognizes that:

The most fundamental principles of corporate

governance are a function of the allocation of power within

a corporation between its stockholders and its board of

directors. The stockholders power is the right to vote on

specific matters, in particular, in an election of directors.

The power of managing the corporate enterprise is vested


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in the shareholders duly elected board representatives.

Accordingly, while these fundamental tenets of Delaware

corporate law provide for a separation of control and

ownership, the stockholder franchise has been

characterized as the ideological underpinning upon

which the legitimacy of the directors managerial power

rests.

MM Cos. v. Liquid Audio, Inc., 813 A.2d 1118, 1126 (Del. 2003) (footnotes

omitted). Following-up on MM Cos., the Delawares Supreme Court held that

Shareholder voting rights are sacrosanct. The

fundamental governance right possessed by shareholders is

the ability to vote for the directors the shareholder wants to

oversee the firm. Without that right, a shareholder would

more closely resemble a creditor than an owner.

Shareholders have limited opportunities to exercise their

right to vote.

EMAK Worldwide, Inc. v. Kurz, 50 A.3d 429, 433 (Del. 2012) (footnotes omitted).

Perhaps because of the deprivation of this sacrosanct right, the Supreme Court

has declared there to be an objective test to demonstrate an injury:

Where there has been a finding of materiality, a

shareholder has made a sufficient showing of causal

relationship between the violation and the injury for

which he seeks redress if, as here, he proves that the

proxy solicitation itself, rather than the particular defect in

the solicitation materials, was an essential link in the

accomplishment of the transaction.

Mills, 396 U.S. at 385 (emphasis added). As held in Dupont v. Wyly, 61 F.R.D. 615

(D. Del. 1973):


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The theory of corporate democracy which underlies

the private right to enforce Section 14(a), [J. I. Case Co. v.

Borak, 377 U.S. 426], is incompatible with the notion that

a shareholder has an enforceable federal right to honest

proxy materials only when transactions approved by a

shareholder vote in which he was misled has resulted in

economic injury to him.

Id. at 629; accord Issen v. GSC Enterprises, Inc., 522 F. Supp. 390, 396 (N.D. Ill.

1981) (plaintiff may show an injury to their corporate suffrage rights to state a

claim for relief under Section 14(a).)

Here, it is clear that Record Holders were deprived of their sacrosanct right to

choose directors, rendering them closer to creditors than owners. That deprivation

of rights was a clear injury. As recognized by Defendants, Charney undeniably had

made positive contributions to the Company over time and had and has supporters,

which supporters presumably included shareholders. Ex. 8 at 126:8-18. It was not

within the Individual Defendants bailiwick as directors to paternalistically decide to

entrench themselves before disclosing their intention to oust Charney. Record

Holders should have been, at the very least, provided information as to the reasons

the Defendants wanted to oust Charney so the Record Holders could cast an

informed vote for the directors they wanted to oversee the Company: a pro-Charney

slate or an anti-Charney slate. That the Defendants clandestinely made the decision

for the shareholders is, standing alone, injury.

3. The Solicitation Material was an Essential Link in Ousting Charney from the Company

The Individual Defendants recognized in briefing to this Court that [i]t was

likely that if he were terminated, Mr. Charney could seek to influence control of the

Board and possibly interfere with the ongoing investigation of his conduct and that

for the derivative plaintiffs who complained Mr. Charney was fired too late, the


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prospect of a board Mr. Charney controlled would have been disastrous. The timing

of the Boards decision to remove Mr. Charney was crucial, and the Board got it

right. Ex. 8 at 125:14-21 (emphasis added). That may be true from a business

judgment rule standpoint with respect to actions . . . to enjoin corporate acts or to

seek damages from directors based on the actions taken by the directors[,] but it

[is] impermissible to allow the business judgment rule, a creation of state law, to

supersede the requirements, prohibitions, and policies of the federal securities laws.

A state business judgement rule cannot permit action otherwise prohibited by the

federal securities laws. SEC v. Keating, CV 91-6785 (SVW), 1992 U.S. Dist.

LEXIS 14630, at *11-12 (C.D. Cal. July 23, 1992) (citing Burks v. Lasker, 441 U.S.

471, 479 (1979)).

Defendants patently could not, relying upon their business judgment, mislead

shareholders into voting for directors who had, contrarily to their solicitations, and

for re-election of certain directors to ensure that they would maintain a majority of

the Board and be able to oust Charney, tout Charneys virtues (see supra at 3) to

solicit votes while simultaneously and carefully plotting his ouster (see supra at 8-

12). Even if the solicitation became duplicitous after its issuance, Defendants had a

duty to update their representations because Rule 14a-9 requires updating of all

proxy solicitations to correct any statement in any earlier communication with

respect to the solicitation of a proxy for the same meeting or subject matter which

has become false or misleading. Jewelcor, Inc. v. Pearlman, 397 F. Supp. 221,

249 (S.D.N.Y. 1975); Lane, 581 F. Supp. 2d at 1122-23.

Moreover, and in addition to having a duty to update statements that became

misleading when viewed in the context of subsequent events[,]10 Defendants

10 In re FoxHollow Techs., Inc., No. C 06-4595 PJH, 2008 U.S. Dist. LEXIS 52363, at *45-46 (N.D. Cal. May 27, 2008) (citations omitted).


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continued soliciting votes while publicly supporting Charney and clandestinely

plotting his ouster. As another court succinctly summarized, [t]here can be no

doubt that the proxy solicitation was an essential link in electing the slate of

directors. The stock holdings of board members[], taken together, [we]re insufficient

to constitute a quorum to elect the board. Thus, the solicitation was necessary if the

proposed corporate action [wa]s to be effected. Berkman v. Rust Craft Greeting

Cards, Inc., 454 F. Supp. 787, 793 (S.D.N.Y. 1978). Only by not allowing informed

shareholders the option to choose a pro-Charney slate could they effectuate their

plan to oust Charney.

C. Plaintiffs are Likely to Succeed on Their Claims for Breach of the Duty of Candor/Disclosure

The duty of candor/disclosure is a specific application of corporate directors

fiduciary duties of care and loyalty, requiring directors to disclose fully and fairly

all material information within the boards control when it seeks shareholder action.

An omitted fact is material if there is a substantial likelihood that a reasonable

shareholder would consider it important in deciding how to vote. Dent v. Ramtron

Intl Corp., No. 7950-VCP, 2014 Del. Ch. LEXIS 110, at *28 (Del. Ch. June 30,

2014).

There can be no reasonable argument that the Individual Defendants, as

directors, were not fiduciaries of the Company. See, e.g., Berkman, 454 F. Supp. at

793 (citations omitted) (It is clear, however, the director defendants stand in a

fiduciary position in relation to the shareholders and owe the highest duty of

absolute good faith and full disclosure.)

1. The Individual Defendants did not Disclose Fully and Fairly all Material Information within its Control While Seeking

Shareholder Action

Delaware recognizes that [t]he shareholder franchise is the ideological

underpinning upon which the legitimacy of directorial power rests. Blasius Indus.,


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Inc. v. Atlas Corp., Del. Ch., 564 A.2d 651, 659 (1988). By misleading shareholders

as to their intentions, as discussed above in Section III.B.1., the Individual

Defendants abused their directorial power.

While the Individual Defendants are correct in their representations in the

Related Derivative Action that Delaware law leaves decisions of how to deal with

such matters [as the termination of a CEO] to in the hands of the Board, Ex. 8 at

122:28-123:1, the business judgment rule has no applicability to the question

whether shareholders have been provided with appropriate information to make an

informed choice because the underlying duty (candor) does not concern the

management of business and the affairs of the corporation. Lewis v. Leaseway

Transp. Corp., No. 8720, 1990 Del. Ch. LEXIS 69, at *16 (Del. Ch. May 16, 1990)

(citing In Re Anderson, Clayton Litigation, Del. Ch., 519 A.2d 669, 675 (1986)).

For the same reasons described above with respect to the Section 14(a) claims,

shareholders were disenfranchised by Defendants firing of Charney after soliciting

votes by representing that Charneys combined role [as CEO and Chariman]

promoted unified leadership and direction for the Board and executive management

and allowed for a single, clear focus for the Companys operational and strategic

efforts[,] among other things. Ex. 1 at 024.

2. The Undisclosed Information Was Material As discussed above in Section III.B.1., the undisclosed information of

Defendants plot to oust Charney was clearly material to their solicitations which

praised Charneys contributions to the Company.

D. Plaintiffs are Likely to Suffer Irreparable Harm Absent Preliminary Relief

It is well-established that a transactionparticularly a change-of-control

transactionthat is influenced by noncompliance with the disclosure provisions of

the various federal securities laws can constitute irreparable harm Mony Group,

Inc. v. Highfields Capital Mgmt., L.P., 368 F.3d 138, 147 (2d Cir. 2004); see also


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Polaroid Corp. v. Disney, 862 F.2d 987, 1006 nn.9 & 11 (3d Cir. 1988) (recognizing

that, at least with respect to the Williams Act portions of Section 14, [t]he

inadequacy of a remedy at law and the importance that Congress has attached to

accurate disclosure of material information establishes irreparable harm and that in

light of the clear congressional intent of Section 14(a), we see no practical

distinction between the harms inherent in these two situations.) Indeed, [a]n

uninformed shareholder vote is often considered an irreparable harm, particularly

because the raison detre of many of the securities laws is to ensure that shareholders

make informed decisions. Allergan, Inc. v. Valeant Pharms. Intl, Inc., SACV 14-

1214 DOC(ANx), 2014 U.S. Dist. LEXIS 156227, at *50 (C.D. Cal. Nov. 4, 2014)

(citations omitted).

While it is too late to prevent[] an uninformed shareholder vote through

corrective disclosures once the inadequate disclosure is discovered which is

preferable to sorting out post-vote remedies for uninformed shareholders[,] id.

(citations omitted), there was never a time where that would have been possible

because the vote was consummated before Defendants intentions were disclosed.

Because, [g]enerally, disclosure deficiencies cannot be remedied effectively by an

after-the-fact damages case[,] [i]t is appropriate for the court to address material

disclosure problems through the issuance of a preliminary injunction that persists

until the problems are corrected. St. Louis Police Ret. Sys. v. Severson, No.: 12-

CV-5086 YGR, 2012 U.S. Dist. LEXIS 152392, at *16-17 (N.D. Cal. Oct. 23, 2012)

(citations omitted). Because Defendants clandestinely ousted of Charney their

inadequate disclosures were never cured. On June 27, 2014, Charney sought to call

a special meeting of stockholders to replace the Board. Ex. 12 at 210. Soon

thereafter, a July 9, 2014 Nomination, Standstill and Support Agreement (the

SAS) was entered into by American Apparel, certain Standard General funds, and

Charney. Ex. 12. The SAS resulted in a suitability committee which was supposed

to complete its investigation within 30 days. Id. at 213. It was not until December


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14, 2014, that the Board voted to terminate Charney in connection with the

suitability committees vote. Ex. 13.

The Court of Appeals has recognized that [d]irect proxy disclosure claims, if

made promptly, may support equitable relief such as an order to amend a proxy

solicitation and require a re-vote. See In re J.P. Morgan Chase & Co. Sholder

Litig., 906 A.2d 808, 825 (Del. Ch. 2005), affd, 906 A.2d 766 (Del. 2006).

However, when the eggs have been irretrievably scrambled[,] . . . there is no

possibility of effective equitable relief. Id. (referring to a claims status one year

after a corporate merger). Calamore v. Juniper Networks Inc., 364 Fed. Appx. 370,

372 (9th Cir. Cal. 2010). Similarly, the Supreme Court held retrospective relief is

available for Section 14(a) violations and [i]n selecting a remedy the lower courts

should exercise the sound discretion which guides the determinations of courts of

equity, keeping in mind the role of equity as the instrument for nice adjustment and

reconciliation between the public interest and private needs as well as between

competing private claims. Mills, 396 U.S. at 386 (citations omitted). When the

Supreme Court reversed and remanded Mills for consideration of retrospective

relief after the [annual] meeting ha[d] been held it held that to foreclose

retrospective relief would allow the stockholders to be bypassed and would

subvert the congressional purpose of ensuring full and fair disclosure to

shareholders. Id. at 381.

This harm is compounded where, as here, an uninformed election has come

to pass, and another election is imminent. Bender v. Jordan, 439 F. Supp. 2d 139,

177 (D.D.C. 2006). In this action, Plaintiffs anticipate that the next election could

happen in the very near future. In the last three years, the Company has issued a

proxy statement regarding the election of directors in late April, with the election

and Annual Meeting going forward (in the last four years) in mid-to-late June. See,

e.g. Ex. 1. Allowing the second election to go forward, where there is a substantial

likelihood that the prior one was at best tainted, at worst void, would helplessly


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complicate matters, perhaps making it impossible to unscramble the eggs should

the post-hoc reorganization of a standing board prove necessary. Bender, 439 F.

Supp. 2d at 177 (finding no adequate remedy at law, [t]he persuasive force of this

reasoning is undiminished by the fact that the misinformed vote has already

occurred. In view of the impending second election, which if allowed to proceed

may hopelessly jumble the Boards membership, injunctive relief remains the

preferred remedy here, and is necessary to protect investors and effectuate the

purposes of the Exchange Act.).

The eggs here have not been irretrievably scrambled because there is no

corporate merger to disentangle. While Greene, one of the directors re-elected

because of the solicitations of the Proxy Statement, resigned pursuant to the SAS,

the other two (Mayer and Danziger) remain on the Companys Board today. Ex. 12

at 208. The directorate has been otherwise completely revamped by the SAS, but

the eggs will be further scrambled by another vote on directors while the Record

Holders remain disenfranchised.

In short, if the anticipated 2015 annual meeting goes forward it will become

more difficult to put the Record Holders in the position they would have been in had

Defendants complied with securities laws.

E. The Balance of Equities Sharply Favors Plaintiffs As recognized by the Supreme Court, Section 14(a) was intended to prevent

directors from obtaining authorization for corporate action by means of deceptive

or inadequate disclosure in proxy solicitation. J.I. Case Co., 377 U.S. at 431.

Delaware similarly recognizes that the Individual Defendants directorial power

rests upon the shareholder franchise. Blasius, 564 A.2d at 659. Moreover, it is also

well settled that where legal rights have been invaded, and a federal statute provides

for a general right to sue for such invasion, federal courts may use any available

remedy to make good the wrong done. J. I. Case Co., 377 U.S. at 433.


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There is significant evidence that the Companys shareholder base, in large

part, sold their shares upon learning that Mr. Charney had been terminated.11

Whatever their motivations, the shareholders now are a largely different body than

the Record Holders. But the Record Holders are the only persons who were

disenfranchisedthey are the victims of Defendants misstatements. Allowing a

different set of record holders to place a different vote for different directors will

make the resolution of this case more difficult. The status quo should be preserved

in the interim, especially given Plaintiffs chance of success, as demonstrated above.

If the Company is allowed to hold its 2015 annual meeting, it will be even harder to

put Plaintiffs and the Record Holders where the federal securities laws envision

themthat meaning that they be given fair corporate suffrage without deceptive or

inadequate disclosure in proxy solicitation.

Notably, as recognized by In re MONY Group Inc. Sholder Litig., 853 A.2d

661 (Del. Ch. 2004), when shares trade in the market, they generally trade without

a proxy, so that the person acquiring the shares does not obtain the right to vote

those shares on [solicitations sought]. Instead, the power to vote remains with the

seller who was the record date holder. Id. at 669. Record Holders thus generally

11 According to trading data from Google Finance, the eleven trading days following Charneys ouster (June 19 to June 30), the announcement of Charneys termination (December 16, 2014), and the days after its disclosure through the SEC (December 18, 19 and 22, 2014) are the 1st, 2nd, 3rd, 6th, 7th, 9th, 10th, 12th, 13th, 15th, and 17th largest volume days ever for trading in Company stock. As of April 22, 2015, the 196,870,133 shares traded on those eleven days represented just over 14.56% of the Companys shares traded within four years, and just over 11.8% of the shares traded since its March 7, 2006 IPO. The three days after the July 9, 2014 Standstill and Support Agreement was announced are the 4th, 5th, and 8th largest volume days ever for trading in Company stock, and round out all of the top ten days, and 14 of the 17 largest volume days ever for trading in Company stock. More shares traded on those 14 days than traded on the 175 trading days between August 12, 2014 and April 22, 2015, even when including the December dates with the total. See Ex. 14.


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maintain the right to vote upon the matters brought up at the 2014 Annual Meeting,

but with the benefit of accurate information to ensure they are not disenfranchised.

That is the only cure for Defendants wrongdoing. Moreover, American Apparels

directors serve staggered three year terms. Ex. 1 at 015. This functionally provides

for consistency and allows historical shareholders limited continued control over

who will serve as directors for up to three years even if they sell their shares. The

Record Holders were the only persons entitled to elect the Class A directors who

would serve three year terms and shape the Companys future, two of whom still

serve on the Board despite their materially misleading statements in the Proxy

Statements. The Record Holders were the persons entitled to know the Class A

directors true intentions for the Companys future. The Record Holders were the

shareholders who were essentially rendered creditors.

F. Plaintiffs Seek Narrowly Tailored Relief Which will Serve the Public Interest

The relief Plaintiffs seek is to prevent Defendants from further scrambling the

egg, have them correct their prior disclosures, and restore to the Record Holders the

rights guaranteed to them by the Exchange Act and Delaware common law. If

further proxy voting is allowed it will be significantly more difficult to make

Plaintiffs and other Record Holders whole. Given Plaintiffs chance of success on

the merits, as discussed above, Defendants should be foreclosed from further

complicating whatever the Court may determine is appropriate retrospective relief

under Mills, 396 U.S. at 386, and subsequent Section 14(a) jurisprudence.

In finding that [a]n injunction ordering corrective disclosures is also in the

public interest, as it prevents an uninformed shareholder vote the Allergan Court

recognized that that the potential threat of an uninformed vote in this case presents

an irreparable harm, that the balance of equities tips in Plaintiffs favor, and that the

proposed injunction to make corrective disclosures is in the public interest. 2014

U.S. Dist. LEXIS 156227, at *51. The same is true here. The broad policies behind


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Section 14(a) and Delaware Corporate will be thwarted if the Record Holders are

allowed to be effectively disenfranchised by the Defendants misstatements. See

Section III.A.2, above.

IV. CONCLUSION For foregoing reasons, Plaintiffs respectfully request that the Court grant this

Motion and issue the requested preliminary injunction Patrice L. Bishop STULL, STULL & BRODY

May 1, 2015 s/ Patrice L. Bishop Patrice L. Bishop 9430 West Olympic Boulevard Suite 400 Beverly Hills, CA 90212 Tel: (310) 209-2468 Fax: (310) 209-2087 [email protected] Michael J. Klein Stull, Stull & Brody 6 East 45th Street New York, NY 10017 Tel: (212) 687-7230 Fax: (212) 490-2022 [email protected] Counsel for Plaintiffs


jan willem hubner & eric ribner vs. allan mayer, david danziger, robert greene, marvin ingelman,...

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