The agreement ends for five years at least any ambition by LVMH, with vast interests from champagne to luggage, to embrace Hermès, known for silk scarves and high-fashion handbags.
LVMH, a leader in the global luxury business, had built up a holding of slightly more than 23.0 percent in smaller rival Hermès, opening hostilities by first acquiring 14.2 percent discreetly in 2010 by means of complex financial instruments.
This holding is now worth about €6.8 billion ($8.9 billion).
The Hermès family, shocked at this initial incursion into their share capital, closed ranks and grouped most of their shares in a holding company.
This had the effect of ring-fencing control in the boardroom and closing the door to any takeover by LVMH.
Litigation followed, largely over the legal and financial techniques used by either side, to gain the upper hand.
Under the deal announced by LVMH on Wednesday, and brokered by the president of the Paris commercial court, LVMH is to distribute all of its shares in Hermès among its own shareholders, and undertakes not to buy any Hermès shares for five years.
The immediate effect of this end to prospects of a bidding war for Hermès, pushed down Hermes shares by 9.38 percent to €238.10.
Sources close to the matter said that the agreement would generate a capital gain of about €2.8 billion for LVMH, and LVMH shares rose by 2.10 percent to €135.85.
Since LVMH revealed in October 2010 that it had secretly built up a holding, shares in Hermes had risen by 64 percent to €262.75 late on Tuesday.
LVMH would therefore have made a profit from the Hermes shares given the sharp rise in the stocks' value.
The agreement was structured so as to limit the damage to Hermès shares, since an outright sale of the holding could have hit the price far harder.
LVMH was founded by French business tycoon Bernard Arnault, and his own holding company Groupe Arnault, as a shareholder in LVMH and in another Hermès shareholder Dior, will end up with 8.5 percent of Hermès once the shares have been distributed, an operation to be completed by December 20th.
At brokers Barclays Bourse in Paris, director Franklin Pichard said: "The speculative premium for Hermès shares has disappeared, hence the plunge in the price this morning. However, investors welcome the distribution to come for shareholders in LVMH and Dior."