AOL shareholders re-elect board, defeat activist

BOSTON Thu Jun 14, 2012 1:30pm EDT

Tim Armstrong, AOL Chief Executive Officer, speaks during the Reuters Global Technology Summit in New York, May 16, 2011. REUTERS/Brendan McDermid

Tim Armstrong, AOL Chief Executive Officer, speaks during the Reuters Global Technology Summit in New York, May 16, 2011.

Credit: Reuters/Brendan McDermid

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BOSTON (Reuters) - AOL Inc (AOL.N) shareholders re-elected the company's eight-member board of directors on Thursday, handing a defeat to activist hedge fund Starboard Value, which had sought to unseat three directors.

AOL shares slid 6 percent to $25.49, their steepest slide on the New York Stock Exchange in more than two months, a move that reflected investors selling ahead of fears that Starboard would look to unload its 5.3 percent stake in the company.

Starboard had aimed to shake up AOL, which is working to transform itself to an ad-driven media destination as it winds down its old business of selling dial-up Internet access.

For its part, AOL management pointed to the roughly 40 percent rise in the shares over the past 12 months and the announced plan to pay out to shareholders the $1 billion in proceeds from the sale of patents to Microsoft Corp (MSFT.O) as proof that they are responding to investor concerns.

Chief Executive Tim Armstrong said the preliminary results showed shareholders had faith in his strategy.

"It was a referendum on our long-term holders and what they feel about our strategy," Armstrong, a former Google Inc (GOOG.O) official who took the helm of AOL in 2009 as it unwound from its disastrous merger with Time Warner Inc (TWX.N), said of the vote.

Company officials cautioned the voting results were preliminary and said they would confirm the final tally in a filing with the U.S. Securities and Exchange Commission.

WAITING ON PATENT PAYOFF

The selloff took AOL shares to their lowest point since early May, when management disclosed its plan to pay out the patent proceeds to shareholders.

"Traders are getting out since they want to be out before Starboard potentially starts to sell its 5 percent stake in the company," said Miller Tabak & Co analyst David Joyce. "Those who want to hold onto the stock for six months or more are going to benefit from the roughly $11 per share payout from the patent sales."

Shareholders asked Armstrong only one question at the meeting, just what form that payment would take.

"We have been out soliciting shareholder feedback in terms of how they would like it returned," Armstrong said, adding that the company was looking for the most tax-efficient way to proceed and that in any event it needed the sale to close first.

"It would not be unusual to expect it to close soon," he told reporters after the meeting, held in Boston which is home to an AOL office and is also close to Armstrong's hometown of Littleton, Massachusetts.

Armstrong also invited Starboard CEO Jeffrey Smith to address the crowd, which met at Boston University.

"We all agree that AOL is undervalued. We also all agree that AOL can achieve substantial revenue growth and far more profitability. The challenge is how to get that accomplished," said Smith, whose fund holds a 5.3 percent stake in AOL. "We hope and expect the newfound energy of the board and management will continue long after this spotlight fades."

Starboard declined to comment when asked whether the fund planned to hold onto its stake in AOL.

DIRECTOR SEARCH

The company has also decided to add two additional directors to its board, and hopes to find them within the next year. It is considering Starboard's nominees, which included Smith, but also soliciting recommendations from other large shareholders and has hired the executive search firm Spencer Stuart to seek nominees.

"We would really like to have a sitting CEO who hopefully is in the tech or mobile space," Armstrong said. "The second one is probably somebody with either deep financial or tech operating skills and ability."

Starboard is the company's fifth-largest shareholder, according to Thomson Reuters data. It launched a campaign late last year to shake up the Internet company, including improving results in its display advertising operation and at the local-news site Patch.com.

Dissident shareholders have been gaining ground in board elections this year. Dissidents have won at least one seat in 12 contested elections this year, according to data from Institutional Shareholder Services released prior to Thursday's vote.

(Additional reporting by Jennifer Saba and Ryan Vlastelica in New York and Ross Kerber in Boston; Editing by Sofina Mirza-Reid, Dave Zimmerman and Tim Dobbyn)

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