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Under the terms of the deal, eight members of the Yahoo board - including chief executive Jerry Yang - will stand for re-election at the company's annual meeting on 1 August.

Carl Icahn will also join the board, with two of his proposed new slate of nine board members joining him. The new expanded board will comprise of 11 members, with current board member Robert Kotick standing down.

Jerry Yang says the Icahn appointment will lift the cloud that's been hanging over the company. "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,"

Yet, Icahn's appetite for a deal with Microsoft seems undiminished. "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," he says in a statement.

And in a clear come-on to Microsoft, Icahn says he will be consulted on any new buyout proposal. "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."

Earlier this month, Microsoft claimed it was only willing to reopen talks with Yahoo if a new board was elected, although it subsequently had another "take it or leave it" deal rejected.