Yahoo and activist investor Carl Icahn have called off hostilities and have agreed to a compromise that puts him on the company's board

In an anti-climax of sorts, the Yahoo management today struck a deal with billionaire investor Carl Icahn that includes a seat for himself with two nominees on the board at the upcoming meeting on 1 August.

The two new directors would be chosen from a list that includes the eight remaining members of the previous Icahn slate plus Jonathan Miller of Velocity Interactive, who had also been CEO of AOL.

The following eight members of Yahoo's current board will stand for re-election at the 2008 annual meeting - Roy Bostock, Ronald Burkle, Eric Hippeau, Vyomesh Joshi, Arthur Kern, Mary Agnes Wilderotter, Gary Wilson and Jerry Yang. Existing board member Robert Kotick will stand down to make way for Icahn.

As part of the settlement, Icahn, who owns an aggregate of 68,786,320 shares, or 4.98 per cent of Yahoo common stock, has agreed to withdraw his nominees for consideration at the annual meeting and to vote his Yahoo shares in support of the board's nominees.

The settlement comes just 11 days before Yahoo's annual shareholders meeting, at which Icahn had originally sought to replace the entire board with his own nominees and oust Yahoo CEO Yang.

But Icahn did not appear to have the backing of prominent Yahoo shareholders such as Legg Mason fund manager Bill Miller, who said on Friday that he would support Yahoo's board. Legg owned 4.4 per cent of Yahoo according to a regulatory filing. (See: Major shareholder supports Yahoo CEO against Carl Icahn)

In a sense, this settlement is a compromise from both sides. While Icahn was finding it hard to garner majority support for a complete restructuring of the board of directors, the company's management apparently didn't want to take a chance and chose to cut their losses. Moreover, it frees up company resources for more constructive activities.

Yahoo CEO Yang admitted as much when he said, ''This agreement will not only allow Yahoo to put the distraction of the proxy contest behind us, it will allow the company to continue pursuing its strategy of being the starting point for internet users and a must buy for advertisers''.

On an optimistic note he added, ''No other company in the internet space has our unique combination of global brand, talented employees, innovative technologies and exceptional assets, attributes that will help us take advantage of the large and growing opportunity ahead of us. I look forward to working together with our new colleagues on the board to make that happen.''

''While 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, I share the view that Yahoo's valuable collection of assets positions it well to continue expanding its online leadership and enhancing returns to stockholders,'' Icahn said.

''I am happy that the board has agreed in the settlement agreement that any meaningful transaction, including the strategy in dealing with that transaction, will be fully discussed with the entire board before any final decision is made,'' he added.

''We are gratified to have reached this agreement, which serves the best interests of all Yahoo stockholders,'' said Yahoo chairman Roy Bostock. ''We look forward to working productively with Carl and the new members of the Board on continuing to improve the Company's performance and enhancing stockholder value. Yahoo is a world-class company with an extremely bright future, and collaborating together, I believe we can help the Company achieve its ambitious goals.''

Yahoo said it intends to file the full text of the settlement agreement later today with the Securities and Exchange Commission, and will also file and mail to its stockholders, supplemental proxy material.