The co-founder and major shareholder of China Gas Holdings Ltd. (0384.HK)--Liu Minghui--has been formally cleared of embezzlement allegations by Chinese authorities more than a year after his arrest, which sparked a steep slide in the company's share price and triggered a hostile takeover bid.

China Gas, which controls gas pipelines that serve more than six million customers in China, said late Wednesday that Mr. Liu and former executive president, Huang Yong, received written "no-prosecution letters" from authorities in the southern city of Shenzhen, where the Hong Kong-listed company is based.

In December 2010, Messrs Liu and Huang were escorted from the company's headquarters by public security officials. Mr. Liu, who was managing director at the time of his arrest, spent close to a year in a Chinese prison on suspicion of embezzlement, before being released on bail. It wasn't clear if Mr. Huang was detained.

The arrests of top officials at the nation's third biggest gas distributor by sales sparked major corporate governance concerns for the company, with its shares later plummeting nearly 50% amid the allegations against Mr. Liu. Mr. Liu, who resigned from the director's post at China Gas after his arrest, couldn't be reached for comment.

The share price weakness created an opening for state-owned oil giant China Petroleum & Chemical Corp. (0386.HK), better known as Sinopec, to make a preliminary US$2.15 billion hostile bid last December in which it would control 45% of China Gas, while its partner ENN Energy Holdings Ltd. (2688.HK), China's fourth-biggest natural-gas supplier in terms of revenue, would take 55%.

The offer price, at HK$3.50 per share, was 25% above China Gas's traded price at the time but had no premium to its average valuation for the last few years. China Gas rejected the deal, saying at the time it "failed to reflect fundamental value." The company's management and shareholders have resisted what they said is too low an offer from Sinopec and ENN.

Despite his arrest, Mr. Liu had been trying to stop the takeover by buying up shares in his former company. Joining Mr. Liu's efforts was London-listed energy company Fortune Oil PLC, which has been purchasing China Gas stock since the deal was proposed publicly and now owns around 16% of the company with Mr. Liu.

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

Their buying has helped push China Gas's share price to over HK$4.00, well above the HK$3.50 price offered by Sinopec and ENN. Furthermore, the hostile offer still hasn't even become official, as China's Ministry of Commerce, which normally rules within two months on whether a deal would violate China's antimonopoly laws, has yet to make a ruling.

A deal would need the approval of more than 50% of China Gas's shareholders. Fortune Oil and Mr. Liu have said they would vote against the deal.

"Unless the two parties raise the offer price, there's no way that this deal will go through," said an analyst at a pan-Asian brokerage, who declined to be named. The analyst said China Gas's announcement on Mr. Liu came as no surprise to the market.

"The fact that Liu was able to work together with Fortune Oil to defend against the hostile bid was pretty clear evidence that he was going to be okay," the analyst said.