The agreement would come after the chipmaker, which had a market capitalization of roughly $4.5 billion at the close of trading on Friday, adopted corporate governance changes after a special vote last month that affected how investors select directors in contested board elections.

Mellanox's shares have been up more than 30 percent since the start of the year and closed at $85.90 on Friday. Mellanox could announce an agreement with Starboard as early as this week that would help it avoid a proxy fight at its shareholder meeting scheduled next month, the people added.

Starboard said last November when it disclosed its stake that it owned about 11 percent of the company.

The settlement with Starboard would involve naming two directors from Starboard's eight-person slate to Mellanox's board, the sources said.

As part of the agreement, another director who will be agreed upon later between Starboard and Mellanox will also be added to the board, the sources added. The 11-member board will not be expanded, the sources said.

The identities of the directors who would be named to Mellanox's board could not be learned. Mellanox's chairman, Irwin Federman, 82, will remain in place, while Peter Feld, a Starboard portfolio manager who was on the activist's slate, will not be added to the board, the sources said.

The agreement includes a so-called standstill agreement between the company and Starboard, which requires the activist shareholder to support the board and company for at least a year, the sources added.

The sources declined to be identified because the talks are confidential, and cautioned that the settlement terms could still change, or that the deal could be abandoned altogether.

Mellanox declined to comment and Starboard could not be reached for comment.

The annual meeting of shareholders has been scheduled for July 25.

Starboard has shaken up boards in the semiconductor space before. In April 2016, its three shareholder nominees, including Feld, were added to Marvell Technology Group's board.

The hedge fund has helped steer a turnaround at Marvell, which has since pursued large acquisitions such as the $6 billion takeover of peer Cavium Inc. Starboard said in a filing last November that Marvell had approached Mellanox about a merger in the past and had been rebuffed.

In the past two years, the chip industry has witnessed a series of deals as companies try to gain market share in emerging areas such as automotive technologies and connectivity.

(Reporting by Liana B. Baker in New York; Additional reporting by Svea Herbst-Bayliss in Boston; Editing by Peter Cooney.)

By Liana B. Baker