"We are extremely pleased that Xerox finally terminated the ill-advised scheme to cede control of the company to Fujifilm", Icahn said in a statement.
The former board said it believes the transaction can not be completed under the circumstances, citing a court injunction and "the lack of shareholder support for the transaction on current terms". He had also been a candidate under consideration by the old board to replace Jacobson as recently as past year, according to court documents.
Xerox said the board would immediately convene to "evaluate all strategic alternatives to maximize shareholder value".
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Icahn and Deason have said they would consider an all-cash bid of at least $40 per share. "With that behind us and new shareholder-focused leadership in place, today marks a new beginning for Xerox".
Fujifilm had said last week it meant to resume discussions with Xerox on a potential combination on "superior terms", but it hadn't received a new proposal from the US company.
As part of the agreement, Xerox and Icahn will withdraw their nominations for any other candidates for the 2018 shareholders meeting (which will be postponed).
The activist investors have also said they are unhappy with the current structure of the joint venture, and settlement creates uncertainty concerning potential changes to a business that accounts for almost half of Fujifilm's revenue. The settlement does resolve Deason's litigation against Xerox and its directors in terms of the proxy fight.
Xerox said it was terminating its agreement to combine with Fuji Xerox after Fujifilm failed to provide audited financials for the joint venture on time, and other issues.
"We do not believe that Xerox has a legal right to terminate our agreement and we are reviewing all of our available options, including bringing a legal action seeking damages", the Japanese firm said in a statement.