Managers of Japan’s Bull-Dog Sauce on Sunday strengthened their hand against Steel Partners, the US hedge fund that is pursuing an unsolicited takeover of the condiment maker, after an overwhelming majority of shareholders approved a proposal to dilute the fund’s ownership stake.

The move marks the latest twist in a high-profile battle which is turning into a litmus test of Japanese attitudes towards corporate reform and activist investors – not least because unsolicited bids from hedge funds have been rare in the past.

The outcome of this tussle could determine whether a western-style mergers and acquisitions market will take off in Japan, bankers say, which could have potentially significant implications for investment flows into the country.

Bull-Dog Sauce, which was founded in 1902, makes a type of Worcester sauce widely used in Japanese homes and restaurants. Earlier this year, Steel Partners took a sizeable stake in the company and in May launched a takeover bid.

However, Bull-Dog is now seeking to reduce Steel Partners’ stake from 10.5 per cent to about 3 per cent through an issue of new stock to shareholders other than the fund, making a buyout more difficult.

Steel Partners is challenging the anti-takeover measure in court, which could rule as early as this week.

However, Bull-Dog shareholders representing more than 80 per cent of voting rights approved the anti-takeover plan at their annual meeting on Sunday.

“Steel Partners is an investment fund whose aim is to generate returns quickly. As a manufacturer, we want to generate profits over the long term,” said Shoko Ikeda, Bull-Dog president.

About 60 per cent more shareholders than normal turned up for the meeting, which was held in a Tokyo hotel ballroom rather than the usual, smaller space at a company factory outside the city.

In siding with managers to chase off Steel Partners, shareholders are snubbing a buyout offer worth 27 per cent more than the company’s market price at the time the bid was launched in mid-May. Bull-Dog will also have to shell out Y2.3bn ($18.6bn) in cash to Steel Partners under the anti-takeover defence, to buy back warrants from the fund in lieu of issuing it new shares.

Warren Lichtenstein, head of Steel Partners, said: “We believe that this anti-takeover measure will materially harm the company’s value and question why the board is using company assets – that could otherwise be used for the company’s growth – to oppose a bid by a supportive, long-term shareholder.”

Steel Partners’ tender offer of Y1,700 a share values Bull-Dog at Y32.3bn. Bull-Dog’s share price has soared on Steel Partners’ bid, closing at Y1,681 on Friday – a gain that could reverse itself if the fund withdraws or is defeated in court.

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