Under the agreement, Icahn -- who owns about 5% of Yahoo's shares -- will get a seat on Yahoo's board and is entitled to recommend individuals from a list of nine candidates for two additional board seats. Yahoo's board is expanded from nine members to 11 members as part of the arrangement.
Yahoo said that eight of its current board members, including chairman Roy Bostock and CEO Jerry Yang, will run for re-election at its Aug. 1 shareholder meeting in San Francisco. Current board member Robert Kotick has decided to vacate his position, Yahoo said.
In a statement, Bostock said the pact "serves the best interests of all Yahoo shareholders."
"We look forward to working productively with Carl and the new members of the board on continuing to improve the company's performance," said Bostock.
Icahn, however, said that the deal does not mean an end to his efforts to broker a sale of Yahoo, or its search operations, to Microsoft or other possible suitors. "I continue to believe that the sale of the whole company or the sale of its search business in the right transaction must be given full consideration," said Icahn, also in a statement.
Yahoo shares were off slightly in pre-market trading Monday, as some investors concluded the agreement -- which gives Icahn control of less than 30% of Yahoo's board -- lessens the chance that the Internet company will be acquired by Microsoft.
Yahoo's current board, which remains mostly intact, has thus far rejected all of Microsoft's overtures. Earlier this month, the board rejected a proposal under which Microsoft would have paid $1 billion for Yahoo's search business plus additional payments in exchange for search referrals from Yahoo's remaining properties.
Yahoo recently signed a pact to outsource parts of its search business to Google, in a deal that would further complicate a transaction with Microsoft or other third parties.
But the Yahoo board's settlement with Icahn should, for the time being at least, bring closure to an acrimonious feud between the two parties that saw each side, almost daily, release public missives accusing the other of incompetence, selfishness, ignorance, and other failings.