(Reuters) - Dow Chemical Co (N:DOW) said it would add four independent directors to its board as part of an agreement with Daniel Loeb's hedge fund, Third Point LLC, avoiding a proxy battle.
Shares of the largest U.S. chemical company rose as much as 4.5 percent in early trading on Friday.
The four new directors will be among Dow's nominees for election at the 2015 annual meeting. The company has also agreed to reduce the size of its board to 12 members from 13 before its 2016 annual meeting.
Dow said Third Point, one of its biggest investors with a 2 percent stake, has signed a one-year standstill agreement with the company.
The $17.5 billion hedge fund was considering a proxy contest after negotiations with Dow over board seats broke down, Reuters had reported on Thursday.
The fund is known for pushing companies, including Yahoo Inc (O:YHOO) and Sotheby's (N:BID), to perform better.
Loeb, one of the hedge fund industry's most closely watched investors, has been pushing Dow to spin off its lucrative but slow-growing petrochemical business and focus on specialty materials.
He had suggested that Dow's earnings before interest, taxes, depreciation and amortization could rise by about $2.5 billion a year if it focused on selling basic petrochemicals such as ethylene and propylene on the open market rather than using them to make foams, glues and other consumer products.
The company, however, defended its strategy of using its commoditized raw materials businesses to keep costs down.
A number of chemical companies, including DuPont (N:DD), have come under investor pressure to separate less stable businesses and raise shareholder returns.
Dow's stock, which had risen 16 percent up to Thursday's close this year, was up 3.2 percent at $53.13 on the New York Stock Exchange on Friday. It had touched a high of $53.79 earlier this year.
(Reporting by Sayantani Ghosh and Kanika Sikka in Bangalore; Editing by Joyjeet Das)