By Michael Erman

Under the terms of the settlement, Rohm & Haas shareholders will still receive $78 per share, plus a ticking fee agreed upon in the original deal.

But Rohm's two largest shareholders -- the Haas Family Trust and Paulson & Co -- will take up to $3 billion owed them from the deal in the form of preferred equity securities in Dow.

The rest of the deal will be in cash.

Dow shares fell 11.3 percent to $6.31, while Rohm shares closed up 7.7 percent at $68.70, both on the New York Stock Exchange.

The two companies were scheduled to face off in Delaware Chancery Court Monday morning, but asked for a delay so they could keep talking in search of a settlement.

Rohm sued Dow in January after Dow refused to go through with the takeover, claiming the deal under its original terms would jeopardize its future.

Dow said late Sunday that settlement talks were going "quite well," but added it would not settle at the original price of $78 a share in cash for Rohm.

Last July, Dow agreed to buy Rohm and Haas for $78 a share to broaden its product offerings in higher-margin markets such as paints, coatings and electronic materials. Because Rohm was highly sought after, Dow agreed to pay what was then a premium of more then 70 percent for the company.

But Dow balked at closing after its $17.4 billion plastics joint venture with Kuwait fell apart. Dow had intended to use proceeds from the venture to help fund the Rohm deal.

The Georgetown, Delaware, courtroom filled up beyond capacity Monday morning, with teams of lawyers as well as Rohm Chief Operating Officer Pierre Brondeau in attendance.

(Reporting by Michael Erman; additional reporting by Paritosh Bansal in New York, editing by Derek Caney, John Wallace and Jeffrey Benkoe)