A board meeting must be convened as soon as possible to choose a new chairman of the Kelon firm if the once leading white goods manufacturer is to be saved, according to a lawyer speaking with China Daily.

"This is particularly important now after Gu Chujun, the president of Kelon's largest shareholder Greencool, was detained three days ago," said Yan Yiming, a Shanghai-based lawyer and shareholders' rights activist. Yan said he is trying to become an independent director of Guangdong- based Kelon, with the aim of looking into the appliance maker's finances.

The Foshan city public security bureau detained five Kelon senior executives on Saturday, accusing them of "economic crimes." The five are Kelon board chairman Gu Chujun, Deputy Chief Executive Yan Yousong, Financial Superintendent Jiang Baojun, Deputy Chief Financial Officer Yan Guoru and Financial Resource Department Vice Director Liu Ke. Zhang Xihan, a senior manager with Shenzhen Greencool Co. Ltd, one of the largest shareholders of Kelon, was also detained by police.

The board of directors of Kelon Electrical Holdings Co. Ltd. confirmed the detentions on Monday night and said it would issue an official response on the matter on Tuesday.

There are rumors that Gu fraudulently used 700 million yuan (US$43.4 million) to 800 million yuan (US$96.4 million) of Kelon's cash to fund the acquisition of Meiling Electrical Appliance, Yaxing Bus and Xiangfan Bearing, all listed companies.

According to Yan Yiming, a board meeting must first be convened to formally dismiss Gu as Kelon's chairman before he can be removed from the list of directors. He has a 26.4 percent stake in the company.

"The earlier this matter is cleared up, the quicker Kelon can pull out of the on-going crisis," Yan Yiming added.

Shareholders were stunned by Kelon's loss of over 60 million yuan (US$7.23 million) in the fourth quarter last year after it reported a total profit of 200 million yuan (US$24 million) in the first three quarters.

Kelon's Hong Kong-traded shares were down 45 percent this year, although the benchmark Hang Seng index was up 2.15 percent.

Its Shenzhen-traded shares have dropped by 70 percent in value.

Insiders say that Kelon's restructuring will be government-led, and local enterprises in Shunde in Guangdong Province are the preferred choice of takeover vehicles.

But according to a top manager with Midea, an electrical appliance producer in Shunde, the restructuring of Kelon will not be easy.

"Currently, Kelon's major assets are its production lines, which are not so valuable in acquisition terms," the manager said, according to China Business News. "Moreover, after this series of blows, Kelon's brand name and social prestige have suffered."

"But I don't think Midea will take over at a time when things are not entirely clear," the manager disclosed. Midea is touted to be one of the potential buyers of Kelon.

The China Securities Regulatory Commission (CSRC) launched an investigation into Kelon in April on suspicion of capital embezzlement and inflated balance sheets.

Three independent directors quit after they received no response to inquiries about Kelon's financial affairs, according to a Kelon stock exchange statement on July 8. Its auditors, Deloitte Touche Tohmatsu, also quit after suspicions were raised about the Kelon's bookkeeping.

Soon after, the Jiaxing Intermediate People's Court froze Kelon's 59.28 million shares in Huayi Compressor Co. and 17.1 million yuan (US$2 million) in deposits after Huayi took Kelon to court over a loan-guarantee dispute.

The team finished its investigation late last month but the results haven't yet been made public.

(China Daily, Xinhua August 2, 2005)