On Tuesday, the Evening Telegraph revealed Kettering Council was taking the company to court because it did not have a licence for the in-store performance in March.
But after a public outcry that received national publicity the council has said i
t will drop the case if HMV donated the £21 cost of the licence to charity, which the company has now said it will do.
A spokesman for Kettering Council said: "It was always our intention that if HMV were to accept they should have had a licence and will abide by the law in future, then the council will go no further on this occasion.
"If HMV were, furthermore, to make a donation to the mayor's charities equivalent to the licence fee of £21, that would, we feel, be an appropriate gesture."
The council said the planned prosecution was nothing to do with Faryl Smith and it would have gone ahead with any performer.
Hundreds of people attended Faryl's performance in March to mark the release of her debut album. She also met with fans and signed copies of her CD.
The law requires businesses and organisations organising one-off entertainment events to obtain a licence in advance.
The leader of Kettering Council, Jim Hakewill, said: "The council and people of the borough are extremely proud of Faryl and this routine prosecution should not reflect upon her."
HMV spokesman Gennaro Castaldo said: "There does appear to have been some kind of misunderstanding as, to our knowledge, we've not been presented with any opportunity to retrospectively apply for the licence.
"We would, in principle, be happy to do so and, of course, to donate the fee to the mayor's charities, although we do first have to consider some conditions the council has attached to this offer.
"All we ever wanted was a common sense solution and we're pleased this appears to be at hand."
