China Gas Holdings Ltd. 0384.HK -0.49%said co-founder Liu Minghui will rejoin the firm as a director, days after he was cleared of embezzlement allegations in China that had resulted in his arrest and 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, starting Aug. 17.

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

Mr. Liu and China Gas's executive president in 2010 were escorted by authorities from the company's headquarters in the southern city of Shenzhen and 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 Shenzhen authorities.

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 China Petroleum & Chemical Corp. 0386.HK +1.01%Sinopec, as it is known, made offered US$2.15 billion for China Gas last December. The plan was for Sinopec to control 45% of China Gas, while Sinopec partner ENN Energy Holdings Ltd., 2688.HK -0.52%China's fourth-biggest natural-gas supplier by revenue, would take 55%.

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

Despite his arrest, Mr. Liu had tried to stop the takeover by buying shares in his former company. He was joined by London-listed Fortune Oil FTO.LN +1.22%PLC, which began purchasing China Gas stock when the deal was proposed publicly and now owns around 16% of the company with Mr. Liu.

Beijing Enterprises 0392.HK +0.30%Group Co., which owns a natural-gas distributor in China's capital, also has been amassing a China Gas stake. Its holding recently stood at 20.3%.

Those purchase helped push China Gas's share price past HK$4, well above the Sinopec offer.

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.