EBay has rejected the proposal as it believes that the company's interest is best served by the current arrangement.
Activist investor Carl Icahn has proposed that eBay spin off its payments unit PayPal into a separate company.
The e-commerce company has rejected the proposal, as it holds that payment is an integral part of commerce.
Icahn, who had previously opposed unsuccessfully the deal to take Dell private, is also demanding that Apple purchase stock from investors. On Wednesday, Icahn said in a Twitter message that his investment group had increased its stake in Apple, with its investment crossing US$3 billion.
EBay said Wednesday that Icahn informed it in a notice that companies controlled by him acquired shares and derivative securities earlier this month that give him an economic interest of about 0.82 percent in eBay. The investor also nominated two of his employees to the company's board of directors.
The board of eBay has explored in depth a spinoff or separation of PayPal and concluded that the company and its shareholders are best served by its current strategic direction, the company said.
"Payment is part of commerce, and as part of eBay, PayPal drives commerce innovation in payments at global scale....," the company said. PayPal is also able to benefit from its parent's technology capabilities, commerce platforms and ties with retailers, brands and large merchants worldwide, it added.
From an online payment processor, PayPal has been broadening its market to include physical stores by offering a variety of new technologies, including its hands-free Beacon technology that uses the Bluetooth Low Energy standard for wireless communications between a store's point-of-sale system and the customer's smartphone to identify and authenticate users.
EBay said it would pass Icahn's board nominations to a committee of its board, "which will consider them in the ordinary course of business." Icahn's plan to spin off PayPal is in the form of a non-binding proposal.
The e-commerce company acquired PayPal in 2002, as it recognized that payment is a vital function in trading on eBay. Integrating PayPal's functionality into the eBay platform "will fundamentally strengthen the user experience and allow buyers and sellers to trade with greater ease, speed and safety," it said at the time.
The payments unit added 5.2 million active registered accounts in the fourth quarter, taking the total to 143 million users. Its revenue increased 19 percent in both the quarter and the full year, resulting in $6.6 billion in 2013, eBay said Wednesday.
Last month, eBay completed a $800 million acquisition of payments company Braintree. The payments company, which services startups like Airbnb, OpenTable, HotelTonight and Uber, is to operate as a separate service within PayPal.