The agreement also calls for the eight members of board of directors to stand for re-election at the Aug. 1 annual meeting and adds two members. One board member, Robert Kotick, is stepping down.
Icahn owns nearly 5 percent of Yahoo! and favors a deal with Microsoft, which offered $47.5 billion for the Internet portal. Yahoo! turned it down and the offer was abandoned.
"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 in a statement distributed by Yahoo!.
"I believe this is a good outcome and that we will have a strong working relationship going forward. "
"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," Yahoo! co-founder and Chief Executive Officer Jerry Yang said.