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By Michael Flaherty and Liana B. Baker
April 27 (Reuters) - Yahoo Inc on Wednesday agreed to add four new independent directors to its board, bowing to pressure from activist hedge fund Starboard Value LP and averting a proxy fight ahead of its upcoming annual meeting.
The agreement shows Yahoo's board and management team were under pressure from major shareholders to settle the battle, and that Starboard was willing to set aside its plan for board control in favor of immediate director seats inside the struggling Internet company.
A truce with its most vocal activist investor helps Yahoo clear the way for the auction of its core businesses, which is underway.
Yahoo said Starboard Chief Executive Jeffrey Smith and three independent directors associated with him will join the board immediately. Yahoo's four new directors were on Starboard's slate that the hedge fund proposed last month to overthrow Yahoo's entire board.
The two sides spoke frequently about ways to avoid putting the fate of the board in the hands of shareholders, according to people involved with the negotiations, but it was not until recently that a deal came into focus. Starboard and Yahoo executives were set to meet in March to discuss ways to avoid a proxy fight, but those talks broke down after Yahoo appointed two new board members, said the people, who did not want to be named.
Key to the agreement is that Smith is also joining Yahoo's strategic review committee, which is overseeing the company's sale of its core business - a process Smith has aggressively pushed.
For Starboard's Smith, the concession is being part of that key committee even though the deal does not give him board control, said Eric Jackson, managing director at SpringOwl Asset Management, a fund that owns Yahoo shares.
"The decision point for Smith was, 'Do we want to be inside the tent when a deal goes down or do we want to be sitting on the outside hoping the board does the right thing?'" Jackson said.
Separately, Starboard struck an agreement with Marvell Technology Group on Wednesday.
Yahoo said in a statement that two incumbent directors, Lee Scott and Sue James, would step down at the annual meeting. With the addition of the four new directors, Yahoo's board will have 11 members.
Yahoo has not set a formal date for its annual meeting, but historically it is held in late June.
Yahoo's agreement with Starboard means the company can now put the prospect of a costly and distracting proxy fight behind it, and focus on the sale of its core search business, which is fielding bids from potential buyers such as Verizon Communications Inc.
The company also faces the complication of sorting out its connection to Softbank Group Corp, which owns 43 percent of Yahoo Japan Corp, and China's Alibaba Group Holding Ltd, in which Yahoo holds a 15.5 percent stake.
Starboard, which owns about 1.7 percent of Yahoo, has been pushing for changes at the company since 2014. The activist hedge fund took aim at Yahoo's leadership in a January letter, implying that Mayer and top officials needed to go.
Yahoo was started by Jerry Yang and David Filo in a Stanford University dorm room, and the search company quickly became a tech-boom darling in the late 1990s.
But starting from just before the 2008 financial crisis, the company has constantly been under threat from activist shareholders unhappy with its performance, including hedge fund heavyweights Carl Icahn and Daniel Loeb of Third Point.
Starboard ramped up its pressure late last year, culminating in a filing in March when it proposed to replace all of Yahoo's board, a rare move in activist investing.
Yahoo's new directors aside from Smith will be tech and media industry veterans Tor Braham, Eddy Hartenstein and Richard Hill, who were part of Starboard's proposed slate.
Yahoo's stock dipped 1 percent to $36.73 per share on Wednesday.
"While Starboard settled for less than control of the board ... we think the firm would only do so if it felt comfortable that other independent directors supported their publicly expressed opinion that the core should be sold," said SunTrust analyst Robert Peck, who rates the stock a "buy."
Additonal reporting by Rishika Sadam in Bengaluru; Editing by Savio D'Souza and Meredith Mazzilli