The management of Woodward & Lothrop Inc. and a group of dissident shareholders reached a settlement last night that will allow Michigan real estate developer A. Alfred Taubman to buy the 16-store chain, sources said.

Under the terms of the settlement, shareholders will receive a slightly higher price than the $59 a share initially offered by Taubman four months ago, sources close to the takeover fight said last night.

They said Taubman will now pay about $60.50 a share.

In return, the dissident shareholders -- descendants of the company's founders -- have agreed to vote in favor of the merger. Additionally, the dissidents, who had been fighting the Taubman offer on grounds that it was inadequate, will have their legal expenses paid by the company. Those expenses are estimated to be near $2 million, according to attorneys for the dissidents.

The settlement came just hours after a highly contentious meeting at which 500 Woodies shareholders voted on Taubman's offer. At that time, it began to appear that management didn't have enough votes to ratify Taubman's $220 million proposal.

While the shareholders were meeting, Monroe G. Milstein, the discount retailer who said he wanted to buy Woodies and struggled frantically to block Taubman's bid, announced he had bought 190,000 Woodies shares for $11 million to gain more votes against the sale. Wall Street sources say Woodies executives immediately started scrambling to shore up support for the Taubman merger, calling major stockholders who had voted against it and trying to persuade them to change their votes.

Meanwhile, the company set 5 p.m. as the deadline for casting proxies on the merger, but minutes before it expired, management extended the deadline another hour.

The settlement means that Milstein, chairman of the New Jersey-based Burlington Coat Factory Warehouse Corp., will not be able to pursue his offer. Milstein had said that if the Taubman bid failed, he would offer $62.40 a share.

Under the settlement, however, it appears that Milstein will be reimbursed for some of the expenses he incurred in making his bid. Additionally, he will receive a small profit on the 190,000 shares he bought this week for almost $58 a share, sources said.

Parties involved in the settlement would not comment publicly on it. But Milstein's son Andrew, speaking for the family, expressed regret at the outcome. "I am dissappointed for us and for the Woodward & Lothrop shareholders, although I am pleased that all the shareholders will receive more than they have been offered for almost the past five months," he said. "We wish Taubman success and we hope Woodies' business continues to prosper."

The settlement was a happy ending for Woodies Chairman Edwin K. Hoffman, who, with two other top executives, has an option to buy 20 percent of the new company for $5 million.

But earlier in the day, with the outcome far from certain, Hoffman faced angry shareholders who, one after the other, denounced the Taubman deal.

Taubman was not present, but his chief spokesman, Bernard Winograd, sat in the front row listening to the shareholders, who vigorously applauded one another as they denounced the merger.

Responding to Hoffman's comments that the courts have not blocked the proposed merger as a group of dissidents had sought, one stockholder said: "Legally this may be acceptable, but morally this is dishonest."

Complaining about the $59-a-share price and the substantial benefits granted to Woodies management, the stockholder, Lavinia Ash Stuart of Bethesda, told Hoffman, "You knew it was not in our interest; you just wanted those huge profits."

Another stockholder complained that the proposal was "disgusting and an insult to shareholders."

During the two-hour meeting, only two shareholders -- both Woodies employes -- spoke in favor of the merger, arguing that Taubman had promised to keep the chain together and thereby protect the company's 8,400 employes. One of those shareholders was jeered after he revealed -- upon request of another shareholder -- that he was vice president in charge of labor relations.

The shareholders argued not only about substance but also about the meeting's procedures, raising objections over rulings such as the requirement that the dissident shareholders speak from the floor while the management was able to use the podium.

As the meeting was going on, supporters of Milstein wandered in and out of the room, whispering about the stock trades that Milstein had made earlier that morning.

Milstein had said that, if the Taubman offer was rejected, he would buy all Woodies shares -- including the 1.8 million Taubman just bought under an option granted to him in the merger agreement -- for $62.40 a share. There had been considerable skepticism about Milstein's claim that he had firm financial commitments to back his offer, because he never made a formal tender offer.

However, after Milstein spent $11 million to buy 190,000 shares, some analysts said they believed he was serious, which was one reason they believed the stock rose one-half point yesterday, closing at 58 3/4 with 156,600 shares trading. According to some knowledgeable sources, not all the shares traded yesterday were going to Milstein; Taubman's supporters also were seeking shares, sources said.

"We wanted to show the seriousness of our commitment," said Richard Collins, an attorney for Milstein. Collins said Milstein didn't move earlier because he was waiting for a federal court ruling on the dissidents' request to bar Taubman from casting his recently acquired shares. On Monday, U.S. District Judge Joyce Hens Green ruled against the dissidents. Within hours of that decision, Milstein was reported to be seeking large blocks of stock. CAPTION: Picture, A. ALFRED TAUBMAN . . . to pay about $60.50 a share