Yahoo Inc (YHOO) said on Monday it will buy 40 million of its shares owned by activist hedge fund Third Point LLC for $29.11 a share, Friday's closing price, and that three Yahoo directors nominated by Third Point have resigned.

Third Point, headed by Daniel Loeb, last year settled a bitter proxy battle with Yahoo after months of criticism of the company. Third Point will still own about 20 million shares, less than 2 percent of the Internet media company's common stock.

The resignations of directors Daniel Loeb, Harry J. Wilson, and Michael J. Wolf were part of Yahoo's settlement with Third Point in May 2012, Yahoo said.

The company, which plans to fund the Third Point transaction primarily with cash, said it would increase earnings per share.

After the deal, about $700 million will remain under a $5 billion overall buyback authorization that Yahoo announced last year.

Yahoo shares fell 87 cents, or 3%, at $28.23 on Nasdaq in early trading.