AOL Inc said it would sell more than 800 patents to Microsoft Corp and grant Microsoft a non-exclusive licence to patents it retains for slightly over $1 billion in cash.
AOL said a "significant portion" of the proceeds would be passed on to shareholders.
AOL shares jumped 37% to $25.16 in pre-market trading Monday on news of the r esults of the patent auction.
One person familiar with the matter said Facebook Inc and Google Inc participated in the auction. Spokesmen for Facebook and Google were not immediately available for comment.
AOL will continue to hold more than 300 patents, including advertising, search and mapping patents, and said it would receive a license to the patents being sold to Microsoft.
"This is a valuable portfolio that we have been following for years and analysing in detail for several months," Microsoft General Counsel Brad Smith said.
Activist shareholder Starboard Value LP had pressured AOL's management to pursue a sale, arguing the patent portfolio could produce more than $1 billion in licensing income if properly monetised.
The deal with Microsoft, expected to be completed by the end of 2012, includes the sale of an AOL unit, on which AOL expects to record a capital loss for tax purposes.
AOL said it expected to use about $40 million of its existing deferred tax assets -- 20% of its total -- to offset any ordinary income taxes resulting from the licensing of its remaining patent portfolio.
Evercore Partners and Goldman Sachs acted as financial advisers to AOL. Wachtell, Lipton, Rosen & Katz and Finnegan, Henderson, Farabow, Garrett & Dunner acted as legal counsel. Cov ington and Burling LLP offered legal advice to Microsoft.
If the deal falls through, Microsoft may pay AOL a termination fee of $211.2 million, AOL said in a regulatory filing.
