SCOTTSDALE Ariz. Two outside shareholders of Kona Grill Inc. have criticized the company’s December agreement to sell $1 million in stock to the father of Kona’s chief executive and chairman at a price below current trading values.
One investor alleged that the deal “crosses the boundaries of good taste,” and another offered a separate $1 million capital infusion. Kona CEO Marcus Jundt said Tuesday he could not comment on the dispute.
Recent filings with the U.S. Securities and Exchange Commission show that Kona agreed on Dec. 22 to sell $1 million of company stock at $1.19 per share to CEO Marcus Jundt’s father, James R. Jundt, who already owns a 4.9-percent stake in the company. The deal was subject to the company receiving a commitment of $3 million in new debt financing from a third party.
Just days after the deal was announced in a Dec. 29 filing, investment firm Clarke Bennitt LLC, in Chadds Ford, Pa., sent a letter to Kona’s board saying it would not support the transaction. It was unclear at press time how large of a holding Clarke Bennitt owns, as the firm has no filings with securities regulators and did not respond to requests for comment at press time.
“Offering shares to James Jundt [your father] at a ridiculously low price of $1.19 for nearly 5 percent of the company is completely unacceptable,” Bennitt wrote. “To further compound [Kona’s] liquidity problem by offering stock to your father at an all-time-low price crosses the boundaries of good taste and in my humble opinion is not operating as a shareholder-friendly CEO.”
The 20-unit Kona chain has about 6.5 million shares outstanding, and over the past 52 weeks the company’s stock price has traded as high as $14.77 and as low as $1.10 per share. On Jan. 5, shares closed at $2.45.
Bennitt continued: “I don’t know how one sleeps at night trying to achieve personal gain at the expense of shareholders. Once again, it raises questions of your ethics and your fiduciary duties to shareholders. You need to understand that you are not working for what is in your [or your father’s] best interest but rather you should be working for what is in the best interest of the company's shareholders.”
The investor recommended that the deal be rescinded immediately and that a competitive bidding process or a rights offering is undertaken “to ensure that a fair price is being achieved for both Kona Grill and for its shareholders.”
Separately, Mill Road Capital LLC of Greenwich, Conn., tendered on Jan. 1 what it called a “superior” and alternative $1 million plan to help Kona raise capital. The investor, which owns about 10 percent of Kona’s stock, offered $1 million in return for 689,655 newly issued shares, or about $1.45 a share.
“We are offering to buy newly issued company shares at a price 22 percent higher than in the James Jundt proposal with substantially less dilution to shareholders and with no finance-related conditions to closing,” Mill Road said in a letter to Kona’s board, which was filed with regulators Jan 2.
Mill Road said it would leave its proposal in place for up to 30 days.
Kona CEO Marcus Jundt said Tuesday that he could not comment on the Mill Capital offer or the dispute. He said it had been forwarded to a special committee of the board of directors for consideration. “We try to do right by all shareholders,” he said.
Kona had previously rejected a March 2008 offer by Mill Road to buy all the restaurant company’s outstanding stock for $10.75 a share. At that time, Mill Road held a 4.9-percent stake in Kona Grill and the per-share buyout price represented a 23-percent premium. The deal would have been valued at about $71 million.
Kona most recently reported a net loss of $5.1 million for the nine months ended Sept. 30, versus a profit of $214,000 a year earlier, mainly on higher expenses and losses from discontinued operations. Its restaurant sales for the nine months rose 10 percent to $57.2 million.
