Starboard, which together with its affiliates owns 5.2 percent of AOL's stock, said it had been approached by several third parties who believe AOL's patent portfolio could produce more than $1 billion in licensing income if properly monetized.

The hedge fund said AOL had valuable intellectual property, such as patents related to secure data transfers, e-commerce, and navigation, among others.

AOL said in a statement that based on its recent earnings improvement, there were signs it was making "significant progress" in executing its growth strategy. It also said its shares are up 20 percent year-to-date.

"Several months ago, prior to Starboard's first letter, the AOL board of directors authorized the start of a process, and hired advisors, to realize the value of certain non-strategic patents," the company said in a statement.

AOL said in a statement it held several meetings with Starboard to address its questions and offered the hedge fund an opportunity to help shape the company's board.

"Unfortunately, Starboard Value LP has a singularly focused agenda and rejected this productive path to address their stated concerns and drive increased shareholder value," the company's statement said.

In December, Starboard reported a 4.5 percent stake in AOL and pushed for a meeting with the Internet company's board to address what it called strategic failings.

The fund said in a statement that it did not intend to seek to replace a majority of AOL's board. There are a total of eight seats on the AOL board, which is chaired by CEO Tim Armstrong.

The five board members nominated by Starboard are: Ronald Epstein, CEO of Epicenter IP Group; Steven Fink, former CEO of Larry Ellison's investments; Dennis Miller, a strategic adviser to Lionsgate; Jeffrey Smith, CEO of Starboard Value; and James Warner, principal of Third Floor Enterprises, an advisory firm specializing in digital marketing and media.

AOL shares were down 1.2 percent at $18.22 in late trading on Friday afternoon on the New York Stock Exchange.

(Reporting by Sayantani Ghosh in Bangalore and Yinka Adegoke in New York; Editing by Unnikrishnan Nair and Matthew Lewis)

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