Not everyone is happy with the campaign being waged against AOL Inc by activist hedge fund Starboard Value -- namely some of the other top shareholders of the fallen Internet icon.

According to three sources with direct knowledge of the situation, some of AOL's top shareholders intend to take their concerns to Starboard, which is mounting a proxy fight for seats on AOL's board. One of Starboard's candidates for the board is its founder and chief executive, Jeffrey Smith.

Those concerns, the sources said, include Starboard's slate of dissident board nominees and its increasingly hostile public campaign, which the other shareholders feel is damaging AOL's prospects.

Starboard is proving to be a real distraction and they are potentially destroying value to some degree, said one shareholder, who requested anonymity.

New York-based Starboard took a stake in AOL in December to address what it described as the company's strategic failings, citing its investment in local-news site Patch and losses at its display ad business.

Starboard currently holds 5.3 percent of AOL, making it the company's sixth-largest shareholder, according to Thomson Reuters data.

PATENT SALE DELAYED

Earlier in April AOL sold the majority of its patents to Microsoft Corp for $1 billion, a price higher than had been expected by some analysts.

AOL had expected to complete the sale in early 2012 after starting the process in the fall, according to two of the sources. It held two board meetings in January but had to put the patent sale on the back burner to address Starboard's demands, according to one of the sources.

Starboard was spun off from Ramius LLC in March 2011. It describes itself as a value investor focused on U.S. small cap companies. Its investment team has previously been involved in shareholder activism with smaller medical and tech companies.

Representatives for Starboard and AOL declined to comment.

SINKING PATCH?

AOL was once one of the world's digital powerhouses, connecting people to the Internet and attracting millions with its email service and instant messaging.

Now it is trying to regain its footing after a disastrous decade-long merger with Time Warner Inc and the increasing irrelevance of its once-lucrative dial-up business in an age of broadband Internet connections and smartphone apps.

In this way, the company's situation is similar to that of Yahoo Inc, an Internet pioneer that has been steamrolled by such competitors as Google and Facebook. Yahoo is trying to ward off Third Point Capital, an activist hedge fund that is pushing its own slate of directors and urging alternatives to maximize value.

Since Tim Armstrong, a former Google executive, took the helm of AOL in 2009 he has made a string of splashy acquisitions, among them the Huffington Post and TechCrunch. He has also plowed money into several initiatives such as Patch, a network of neighborhood news websites.

Starboard and other critics have expressed concerns that Patch is a money pit, in which AOL has invested about $150 million to attract advertisers.

Following the news of AOL's patent sale, Starboard fired off a letter saying that it was pleased with the deal but that AOL should return all the proceeds to investors.

We remain concerned that shareholder capital will continue to be used for poorly conceived acquisitions and investments into money-losing initiatives, the letter said.

AOL said it planned to return a significant portion of the proceeds to investors.

Armstrong described Patch as incredibly valuable in an interview earlier this week. For the first quarter of this year, AOL said at an investor conference, Patch booked 80 percent of the total revenue it did in 2011.

Armstrong also met this week with top investors in New York after the announcement of the patent sale, the sources said.

If they don't reach their goals for this year, they will have to reconsider their strategies around (Patch), according to one of the three sources.

One way to possible Patch profitability, the source said, is finding a media partner to form a joint venture.

(Reporting by Nadia Damouni and Jennifer Saba; Editing by Peter Lauria)

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