AOL Inc (NYSE:AOL) 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 5 percent to $25.72, their steepest slide on the New York Stock Exchange in more than two months.
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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.
Chief Executive Tim Armstrong said the preliminary results showed shareholders had faith in his strategy, which he said helped the shares surge roughly 40 percent over the past year, greatly outpacing the 7.5 percent rise of the tech-heavy Nasdaq composite index <.IXIC>.
"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.
The company's hold on the board in part reflected shareholder relief after AOL inked a deal to sell most of its patents to Microsoft Corp <MSFT.O> for $1 billion, a sum that it intends to disburse to shareholders after the deal closes.
"I think the patent sale was a big relief for investors and paved the way for a little more patience," said Clayton Moran, an analyst with the Benchmark Company.
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."
DEBATING HOW TO PAY SHAREHOLDERS
Armstrong faced only one shareholder question at the meeting -- just how AOL planned to pay out that $1 billion, which works out to a little more than $10 for each of its 93.5 million shares outstanding.
"We have been out soliciting shareholder feedback in terms of how they would like it returned," Armstrong said, noting 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 nearby Armstrong's hometown of Littleton, Massachusetts.
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.