GM CEO Mary Barra approves a major stock deal.

General Motors plans to buy back $5 billion in share as part of a deal reached with activist investor Harry J. Wilson. Both GM and Wilson called the deal an example of “constructive dialogue.”

In the process, Wilson, a former member of the Obama Administration’s automotive task force, agreed to withdraw his request for a seat on the GM board of directors. And the deal falls short of his original goal of an $8 billion buyback.

“GM is moving ahead with its comprehensive capital allocation framework, and constructive dialogue with our shareholders has helped ensure that we are addressing these key initiatives with the appropriate level of clarity and transparency,” GM CEO Mary Barra said in a statement.

The maker referred to its decision as a “foundational element” of its strategy to return free cash flow to shareholders while maintaining a healthy balance sheet with at least $20 billion cash to maintain an investment grade debt rating.

Getting back that rating was a key goal of former GM Chairman and CEO Dan Akerson before his retirement at the end of 2013.

(Click Here to learn more about the original Wilson buyback plan.)

Wilson sent shock waves through the automotive and investment communities when he outlined his plan to take a seat on the GM board and then get $5 billion in cash for investors. He was backed by a group of four heavyweight hedge funds controlling 1.9% of GM’s shares, Taconic Parties, Appaloosa Parties, HG Vora Parties and Hayman Capital.

The demand was criticized by some other key investors, including Berkshire Hathaway’s CEO Warren Buffett, and GM management initially seemed reluctant to go along.  But the maker has also taken heat for its relatively low stock price which has been floating in the $31 to $38 range in recent months. It closed Friday at $36.84 a share, down 77 cents.

But word of the deal sent GM shares climbing rapidly. As of 9:00 AM, the stock was up 2.61%, to $37.80.

Monday’s announcement followed word from GM last month that it would increase its second quarter dividend to 36 cents, a 20% jump.

“As we continue to execute on our plan to become the most valued automotive company, our track record of improved operating performance, strong earnings momentum, and disciplined capital investments provide the foundation for a comprehensive capital allocation framework,” Barra said in her statement.

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Skeptics have cautioned that a buyback could hurt GM’s efforts to fund its increasingly aggressive product development program which, in turn, would limit its ability to compete not only in the U.S. but other markets around the world, such as China, where it has slipped into second place behind German giant Volkswagen AG.

Volkswagen has also nudged past GM to become the world’s second-largest automaker by unit sales, lagging only Toyota Motor Co. And Renault-Nissan Alliance CEO last week laid out ambitious plans to push past GM to become the number three maker before decade’s end.

But Barra’s comments appear to downplay concerns that the buyback would hurt GM’s competitive abilities. The maker ended 2014 with $25.2 billion in cash, down from $27.9 billion a year earlier.

But besides the payout to investors – which will begin immediately and continue through the end of 2016 – the Detroit maker faces other challenges that could hurt its balance sheet.

It still hasn’t completed the final tally for the victim’s compensation fund it created to cover the deaths and injuries caused by a faulty ignition switch. GM is also expected to be hit with a large fine as the result of an ongoing probe by the U.S. Justice Department into why the maker waited a decade to order a recall for the defective part.

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