(Updates with AOL stock up more than 43 percent at end of trading day.)

AOL stock closed up more than 43 percent Monday on news that the company will sell more than 800 patents to Microsoft for just over $1 billion -- and pass much of the proceeds on to shareholders.

AOL stock surged 43.32 percent to $26.40 per share, even as stocks were down overall. Microsoft stock fell 1.33 percent, closing at $31.10 per share.

Also read: AOL Announces $250M Stock Buyback After Shares Plummet [4]

The deal will leave AOL with more than 300 patents and patent applications. In a statement, the company said its "management and its Board of Directors intend to return a significant portion of the sale proceeds to shareholders and will determine the most efficient and effective method to do so prior to the closing of the transaction."

AOL stock hit its highest levels since November 2010 as the company looked prepared to reward investors for its recent volatilty. The stock has had a bumpy ride since AOL agreed to buy the Huffington Post in February 2011, hitting a low of $10.22 on Aug. 10. AOL announced a $250 million stock buyback [4] the next day, and AOL stock has slowly climbed in recent months.

"The agreement with Microsoft represents the culmination of a robust auction process for our patent portfolio," said Tim Armstrong, AOL's Chairman and CEO. "We continue to hold a valuable patent portfolio as highlighted by the license we entered into with Microsoft. The combined sale and licensing arrangement unlocks current dollar value for our shareholders and enables AOL to continue to aggressively execute on our strategy to create long-term shareholder value."

"This is a valuable portfolio that we have been following for years and analyzing in detail for several months," added Brad Smith, Microsoft's general counsel and executive vice president of legal and corporate affairs. "AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio."

The deal is expected to be complete by the end of the year.