HONG KONG (Reuters) -- A shareholder challenge that could make the Bermuda-based Jardine Group vulnerable to a takeover faces stiff opposition from the ruling Keswick family but signals growing investor discontent with one of Hong Kong's oldest and most famous trading houses.

And it could lay the groundwork for possible legal action to weaken the defensive armour of the "Noble House,'' fund managers and analysts say.

Jardines, with businesses ranging from grocery stores to luxury hotels, is under fire from San Diego, California, based Brandes Investment Partners LP to scrap the cross-shareholding structure between its core companies Jardine Matheson Holdings Ltd and Jardine Strategic Holdings Ltd.

Brandes' proposal will be put to shareholders at Jardine Matheson's June 1 annual meeting in Bermuda. It wants Jardine Matheson to make a general offer for Jardine Strategic's shares, effectively creating a single holding company.

Jardine Matheson owns 62 percent of Jardine Strategic, while Jardine Strategic owns 40 percent of Jardine Matheson. Each company controls a majority of directors on the other's board.

The structure, more than a decade old, has protected the group from a hostile takeover, but many analysts say it has been a drag on the share prices of the two companies and affiliated firms they control, including Hongkong Land Holdings, Dairy Farm International Holdings and Mandarin Oriental International.

"We want to get this discussion in front of the shareholders and the directors,'' Brandes managing partner Glenn Carlson told Reuters in an interview.

"We think the majority shareholders probably agree with these proposals,'' he said.

Brandes, with about US$42 billion under management, says it holds about 8 percent of Jardine Matheson and two percent of Jardine Strategic.

Carlson said he would like to see Jardine Matheson's proceeds from the sale of British investment bank Robert Fleming -- US$696 million in cash and 7.08 million shares in Chase Manhattan Corp -- applied toward a general offer.

Brandes is soliciting support from other institutional investors and already has an ally in Templeton Franklin Investment Services, whose funds hold other big positions in Jardine Matheson.

Mark Mobius, head of Templeton Emerging Markets fund, said he believes the plan will enhance shareholder value.

"What's wrong with Jardine is what's wrong with so many other companies in these markets around the world: small groups of minority investors controlling a company to the detriment of other investors.'' He said Templeton Emerging Markets would consider joining in legal action against Jardine if the company continues to ignore shareholder demands.

For its part, Jardine said it is focused on delivering value through strong cash flow and cost reductions. "We believe that the motivation behind these resolutions is based on a misconception of the business environment in which we operate,'' Jardine Matheson Chairman Henry Keswick said in a letter urging shareholders to reject the proposals.

"The stability which the group structure creates enables its businesses to compete effectively in their chosen marketplaces and plan for the long term in what remains a volatile region,'' said Keswick, whose family has controlled the Jardines' empire for over 125 years.

Keswick and his brother retain control of the group despite having only 10 percent of the shares.

The Keswicks' desire to keep the structure in place is widely believed to have caused the departure of former managing director Alisdair Morrison earlier this year after raising the issue, analysts said.

"Brandes knows that management's not going to go for this and they don't have the votes to push it through,'' said Scott Benesch, conglomerates analyst at Donaldson Lufkin & Jenrette Securities in Hong Kong.

"It could be an attempt to lay the groundwork for some sort of legal challenge,'' he added.

Although removal of the structure would add an instant takeover premium to the stock, a more likely scenario of a drawn-out court challenge would likely put pressure on the shares and draw in arbitrageurs, Benesch said. Jardine Matheson shares finished at S$4.22 yesterday, capping a 5.5 percent gain since the Brandes proposal was disclosed on Monday evening.