The agreement ends a battle launched by Darwin Deason and Carl Icahn, who together control 15.2 percent of Xerox shares and objected to the proposed deal.
According to the Xerox statement CEO Jeff Jacobson is expected to be replaced by Keith Cozza as board chairman and John Visentin as CEO - candidates supported by the two shareholders.
Judge Barry Ostrager of New York's Supreme Court in Manhattan had ruled the deal prioritized the CEO's interests over that of major shareholders.
Deason and Icahn sued in February opposing the deal and alleging fraud.
Under the planned deal, Xerox would have been absorbed by an existing joint venture known as Fuji Xerox, falling under the control of Fujifilm, which then held a 75 percent stake in the joint venture.
After the transaction's completion, Fujifilm would have held 50.1 percent of Fuji Xerox - compared with 49.9 percent for current Xerox shareholders, who were to receive a special cash dividend of $2.5 billion (roughly Rs. ).
The Xerox board pushed for this deal even though, Deason has said, it was not in the interest of the company or its shareholders.
The billionaire also claimed Xerox made a secret deal in 2001 allowing Fujifilm to exit the Fuji Xerox joint venture if Xerox were taken over by any investor other than the Japanese firm.
Deason argued this clause prevented the Xerox board from seeking another buyer and this in turn harmed the company's shareholders.
Xerox said the suit was groundless.
Under Tuesday's agreement Jacobson along with six other current Xerox board members will step down, and allow Xerox to name their replacements.
"The new Board of Directors plans to meet immediately to, among other things, begin a process to evaluate all strategic alternatives to maximize shareholder value, including terminating or restructuring Xerox's relationship with Fujifilm and the proposed transaction with Fujifilm," a statement from Xerox said.