By Prudence Ho

HONG KONG--China Gas Holdings Ltd. (0384.HK) said Monday that company co-founder Liu Minghui will rejoin the firm as a director, days after he was formally cleared of embezzlement allegations in China that resulted in his arrest and later sparked a hostile takeover bid from the nation's biggest oil company.

China Gas, which controls gas pipelines that serve more than six million customers in China, said Mr. Liu will rejoin the company as a nonexecutive director, effective Aug. 17.

China Gas said in a statement that Mr. Liu's appointment "is a step toward appointing him as an executive director once regulatory and procedural requirements have been met."

In December 2010, Mr. Liu and China Gas's former executive president were escorted from the company's headquarters in Shenzhen by public-security officials and were arrested. Mr. Liu, then managing director--he resigned after his arrest--was jailed for close to a year before being released on bail.

China Gas on Wednesday said Mr. Liu received "no-prosecution letters" from authorities in the southern city of Shenzhen, where the Hong Kong-listed company is based.

Following Mr. Liu's arrest, shares of China Gas, the nation's third-biggest gas distributor by sales plummeted nearly 50%, creating an opening for a hostile bid from state-owned oil giant China Petroleum & Chemical Corp. (0386.HK), better known as Sinopec.

It made a preliminary offer of US$2.15 billion last December. Under the deal, it would control 45% of China Gas, while its partner, ENN Energy Holdings Ltd. (2688.HK), China's fourth-biggest natural-gas supplier by revenue, would take 55%.

China Gas rejected the deal, saying it "failed to reflect fundamental value." At 3.50 Hong Kong dollars (45 U.S. cents) a share, the bid was 25% above the share price at the time, but wasn't at a premium to the company's average price over the past few years.

Despite his arrest, Mr. Liu had been trying to stop the takeover by buying up shares in his former company. He was joined by London-listed energy company Fortune Oil PLC (FTO.LN), which began purchasing China Gas stock when the deal was proposed publicly and now owns around 16% of the company with Mr. Liu.

In recent months, Beijing Enterprises Group Co., which owns a natural-gas distributor in China's capital, also has been amassing a China Gas stake; earlier this month its holding stood at 20.3%.

Their buying has helped push China Gas's share price past HK$4, well above the HK$3.50 offered by Sinopec and ENN.

The hostile takeover bid would need the approval of more than 50% of China Gas's shareholders. Fortune Oil and Mr. Liu have said they would vote against it.

Write to Prudence Ho at prudence.ho@dowjones.com

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