A forthcoming court ruling on a foreign investor's request to bar condiments maker Bull-Dog Sauce from deploying its "poison pill" takeover defense holds the promise of measurably altering Japan's market for corporate control.

The court's decision will have far-reaching implications for merger and acquisition activity in Japan while also signaling to investors how seriously the world's secon-largest capital market views the rights of shareholders, governance observers say.

"This will be a seminal case," Scott Jones, a corporate lawyer at the Tokyo office of Jones Day, told The Wall Street Journal. "It will shape the playing field."

At issue is the pill adopted by Tokyo-based Bull-Dog Sauce in response to a bid last month from activist fund Steel Partners Japan Strategic Fund (Offshore). The defense specifically targets Steel Partners, whereby the company could issue warrants to selectively dilute the fund’s stake from a current 10.5 percent to less than 3 percent.

Provisions within the plan bar Steel Partners from converting warrants into shares, unlike other shareholders would be allowed to do. The fund would be entitled to just 396 yen per share, or roughly 23 percent of the value of its current tender offer to shareholders, and provisions also allow the company to forgo a cash award, potentially leaving the fund with little more than worthless paper.

Fund officials have branded the pill discriminatory and in contravention to Japanese company law, which requires equal treatment for all shareholders.

Bull-Dog Sauce, whose trademark Worcester-style sauce is a fixture in most Japanese kitchens, rebuffed the Steel Partners offer on June 7, saying it would damage "corporate value and the collective interests of shareholders." Management is defending the pill as "legal and appropriate."

Steel Partners is calling on shareholders to vote against a proposal authorizing the pill's deployment at the company's June 24 annual meeting. Those calls are being buttressed on the legal front where the fund has filed an injunction request with the Tokyo District Court to keep the company from installing the pill if shareholders approve the measure.

Analysts suggest the court's decision may hinge on how it views the fund’s May 18 offer for the company. Specifically, deliberations will likely center on whether the fund is strictly seeking control, or is attempting to use the bid to achieve short-term gains in a practice known as "greenmail."

Greenmailing, by definition, precludes other investors from seeing the same financial benefits as those of the bidder, which, under terms of the Bull-Dog Sauce offer, would not be the case. The fund also says it has held a stake in Bull-Dog Sauce since 2002.

Steel Partners has in recent years bid on a handful of Japanese companies that saw their stock price head upwards on news of the offer or the potential for a "white knight" entrant. While never successful in achieving control, the fund has walked away with a tidy profit in virtually every case, either through the sale of portions of its stake, or through defensive management actions to enhance value such as through increased dividends.

That history is not lost on Steel Partners head Warren Lichtenstein. The normally media-shy investor has spent much of the past two weeks defending the strategic outlook of his fund’s bid while seeking to counter his portrayal in the Japanese media, which has in recent weeks highlighted his aggressive manner of investing.

"Many so-called activists force changes at a company and then sell their entire investment to reap short-term gains. This is not Steel Partners' investment style," Lichtenstein said at a June 12 media briefing, according to Business Week.

Japan's courts have twice ruled against the use of pills or the issue of diluting warrants. In 2005, a court barred control and measuring systems manufacturer Nireco from deploying its pill without shareholder approval. However, in its decision, the court noted that pills could be allowed if they were used to defend against greenmailers.

Foreign investors worry that should the court decide in favor of the company, Japanese boards-- which are overwhelmingly made up of insiders--will view the decision as a green light to selectively determine who their shareholders should be. That, analyst say, will have broad implications for Japan’s capital markets.

"Japan [would be] going back to the dark ages," one corporate lawyer told the Financial Times."It will really depress the stock market."

Conversely, a ruling in favor of Steel Partners may embolden activist funds to further press for change, a trend evidenced already this year. Between 2004 and 2006, ISS’ Governance Research Service tracked just 18 shareholder proposals calling on Japanese companies to boost dividends. This year, foreign activist funds alone--who prior to this proxy season have never before circulated shareholder proposals of any kind at Japanese firms--have submitted nearly half that number.

Meanwhile, non-Japanese investors have raised their holdings in Japanese companies to an all-time high, the Financial Times reports. International investors increased their stake in Japan's stock market to 28 percent in March from just over 26 percent in 2006 and just 4.7 percent in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese exchanges.

The expiration of the Steel Partners tender offer was pushed back from June 28 to Aug. 10 in what analysts say is a bid to give the courts more time to weigh in. The fund also raised its May 18 offer from 1,584 yen per share--an 18.6 percent premium to the May 16 share price--to 1,700 yen per share.