Under the agreement, subject to court and shareholder approval, Tyco would set up a settlement fund to pay shareholder claims after former Chief Executive Officer Dennis Kozlowski and other top officers were charged with stealing $600 million from the company and inflating its value, Tyco said.
"With this settlement we are taking an important step to resolve our most significant remaining legacy legal matter," Chairman and CEO Ed Breen said in a statement.
Tyco, of Princeton, N.J., said it would take a $2.98 billion charge this quarter to cover the payments.
Tyco was sued in January 2003 by shareholders who owned Tyco stock between December 1999 and June 2002. The suit became a class action last June and was combined with other cases covering shareholders as early as Oct. 1, 1998.
Kozlowski is serving a sentence of 8 1/3 years to 25 years. He and former Chief Financial Officer Mark Swartz are appealing their sentences.
Tyco is separating its healthcare unit into a publicly traded company called Covidien and its electronics division into a public company called Tyco Electronics.
Breen will become head of Tyco Fire & Security and Tyco Engineered Products & Services.
The breakup is slated to take place by June 30.