In this May 4, 2007 file photo Times Square news ticker flashes a headline about Microsoft above a billboard for Yahoo in New York. - AP

Yahoo Inc said Monday it reached a settlement with activist investor Carl Icahn that will put him and two of his nominees on an expanded board of directors.

The agreement will avert a battle over control of the company that was expected at an August 1 shareholders vote.

Under the agreement, eight members of the current board will seek re-election.

Icahn will be appointed to the board, and two other seats will be filled based on a list of nine candidates recommended by Icahn.

Yahoo also said Robert Kotick will not stand for re-election to the board. After he steps down and the Icahn slate is added, Yahoo's board will end up with 11 members.

Hand-picked directors

Icahn had wanted to replace Yahoo's directors with his own hand-picked slate to negotiate a sale of all or part of Yahoo. In a statement, Icahn said he believes the sale of the company still merits "full consideration."

Yahoo shares fell nearly two per cent to US$22.02 in premarket trading from a US$22.45 close Friday. Shares of Microsoft Corp, Yahoo's spurned suitor, rose 14 cents to US$26 from a US$25.86 close Friday.

Microsoft had attempted to buy Yahoo earlier this year, and Icahn made it clear he would try to negotiate a sale to the software company if he took control of Yahoo's board.