Ligand Pharmaceuticals ( LGND) and its biggest investor have declared a truce, agreeing to terms before a proxy contest that had been scheduled for next month.

The deal between the company and Third Point LLC enables the investment management and advisory firm to add three members to Ligand's eight-member board and help the company assess its options. The proposal, announced Monday, is similar to one that was previously proposed by Third Point and ignored by Ligand.

The sides issued a joint press release in which Ligand said it was "excited by the opportunity to work closely with the expanded board." Third Point praised Ligand as "a strong company with an extraordinary product pipeline."

However, behind the kind words and behind the scenes, another big shareholder put pressure on San Diego-based Ligand to settle its differences with New York's Third Point. The previously silent shareholder is David M. Knott of Syosset, N.Y., who runs several partnerships and management firms that own 7.26 million shares, or 9.7% of Ligand's stock.

Third Point, through its management company and several funds, owns 7.74 million shares, or just under 10%.

Knott recently told Ligand that although he had bought its stock "solely for investment purposes," he had become convinced that Third Point was correct in its dispute with the company, according to a document filed Dec. 2 with the Securities and Exchange Commission.

Three members of Knott's management team met with Ligand's top executives Nov. 22 to discuss Ligand's strategy. Knott said that if he were forced that day to choose between Ligand's and Third Point's nominees for the board, he would favor Third Point.

Saying he would keep an "open mind," Knott "expressed most emphatically" that he wished to avoid a proxy fight so that Ligand could proceed with its strategic restructuring and shareholders could get the most value from the company.

The new deal with Third Point allows Daniel S. Loeb, the investment firm's CEO, and two other nominees to join the board effective Dec. 8. While Third Point nominees serve on the board, and for at least six months after the agreement is signed, the firm won't sell shares, solicit proxies or "take other certain stockholder actions."

Ligand also has agreed to recommend the Third Point nominees for election to the board through 2007. In addition, Ligand will pay Third Point up to $475,000 for certain expenses.

Ligand announced on Nov. 18 that it had hired UBS to provide advice on strategic alternatives, which could mean the entire company would be put up for sale. Previously, Third Point had complained about Ligand's performance and strategy. Ligand has had to restate full-year results for 2003 and 2002, as well as partial results for 2001 and 2000.

The company wasn't able to file its 10-K for 2004 until last month, and it hasn't issued formal results for the first three quarters of 2005. Ligand has promised to file the quarterly reports with the SEC this month.

The filing delays led to the company's delisting from Nasdaq in September. Ligand now trades on the "pink sheets," and its filing issues prompted an investigation by the SEC. Ligand says that once all of its filings are up to date, it will seek reinstatement for a Nasdaq listing.

More from Stocks

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

Quick Read: 3 Things for Investors to Know Before Wednesday's Trading Session

Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Replay: Jim Cramer on the Markets, Oil, General Electric, Zillow and Micron

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Pegasystems Founder Explains Why He Has One of the Hottest Tech Stocks Around

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Micron Shares Soar; Chipmaker Is 'Managing for Profitability' Now, Says Analyst

Dow Slips 178 Points; S&P 500 and Nasdaq Also Decline

Dow Slips 178 Points; S&P 500 and Nasdaq Also Decline