There ain’t gonna be no highly diverting no-holds-barred fight-to-the-finish proxy fight over Yahoo come the company’s stockholders meeting August 1.

The two sides cut a deal Monday. Yahoo will be giving corporate raider Carl Icahn – who was threatening to replace the whole Yahoo board with cronies of his own and oust Yahoo CEO Jerry Yang – three seats on an expanded 11-man board still dominated by current Yahoo management that favors the anti-Microsoft status quo.

Icahn himself will get a seat and the eight remaining Yahoo directors will pick the other two from a list of nine nominees that Icahn puts forward – plus former AOL chief and now a partner in Velocity Interactive Group Jonathan Miller.

Icahn is supposed to withdraw his rival slate and vote his own shares (4.98%) for the board slate, which is everyone who’s been there minus Activision CEO Robert Kotick who is stepping down.

It remains to be seen whether Icahn will continue to pressure for the removal of Jerry Yang, who has lost Yahoo stockholders a heck of a lot of money. Presumably Miller is being positioned as Yang’s successor.

Icahn issued a statement via Yahoo saying, “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 shareholders.”

The statement suggests the possibility of Microsoft getting back in the game just got dim or at least dimmer although Icahn did say in his statement that he was “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.”

The move, after Yahoo rejected at least four offers from Microsoft – the last a bid by Microsoft and Icahn together for Yahoo’s search business – took another inch off of Yahoo’s stock price on which much may ultimately hang. If it really sinks everybody may get a lot more motivated.

Microsoft, which has said it only wants Yahoo’s search business now, not the whole company, has yet to say anything about the latest turn of events, which deprives it of the proxy fight leverage

Icahn’s proxy fight failed to enlist Yahoo’s biggest institutional investors with his failure to produce a viable deal from Microsoft or a plan to turn the company around.

On Friday Legg Maison Capital Management, which owns 4.4% of the joint, said it would back Yang and his board.

Yahoo is scheduled to release its Q2 earnings tomorrow.

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