Shares of Xerox Corp. (XRX) are falling after the company announced the termination of its deal with Fujifilm (FUJIY) and a new settlement agreement with billionaire investors Carl Icahn and Darwin Deason.

FUJIFILM DEAL TERMINATED: On Sunday, Xerox announced that it notified Fujifilm that the agreement to combine Xerox with Fuji Xerox is being terminated due to the failure by Fujifilm to deliver audited financials of Fuji Xerox by April 15, material deviations from unaudited statements when delivered and other circumstances limiting the ability of the company, Fujifilm and Fuji Xerox to consummate a transaction. The Xerox board said, "Over the past several weeks, the Xerox Board has repeatedly requested that Fujifilm immediately enter into negotiations on improved terms for a proposed transaction. Despite our insistence, Fujifilm provided no assurance that it will do so within an acceptable timeframe. The Xerox Board believes that the transaction cannot reasonably be expected to be completed under these circumstances, particularly given the court's injunction of the transaction and the lack of shareholder support for the transaction on current terms, as well as the unresolved accounting issues at Fuji Xerox." In a statement, Fujifilm said Xerox did not have the right to terminate the deal and the company will consider all options including legal action seeking damages.

SETTLEMENT AGREEMENT: In addition, Xerox entered into a new settlement agreement with Icahn and Deason, resolving the pending proxy contest in connection with the company's 2018 Annual Meeting of Shareholders and Deason's litigation against Xerox and its directors. The agreement does not affect any claims of Deason or other Xerox shareholders against Fujifilm for aiding and abetting, Xerox said. Under the terms of the agreement, Xerox appointed Jonathan Christodoro, Keith Cozza, Nicholas Graziano, Scott Letier and John Visentin to its board. Gregory Brown, Joseph Echevarria, Cheryl Krongard and Sara Martinez Tucker will continue to serve as members of the board and Robert Keegan, Charles Prince, Ann Reese, William Curt Hunter, and Stephen Rusckowski resigned. Jeff Jacobson resigned from his role as chief executive officer and as a member of the board. Keith Cozza, the CEO of Icahn Enterprises (IEP), is expected to be appointed as the new chairman and John Visentin is expected to be appointed as the vice chairman and new CEO.

WHAT'S NOTABLE: Xerox and Fujifilm previously announced a $6.1B deal to combine Xerox with their Asia joint venture Fuji Xerox in January drawing criticism from Icahn and Deason, who urged shareholders to vote against the merger as they felt it undervalued the company. In February, Deason sued both companies for fraud seeking to block the deal from being completed and sought to nominate a full slate of directors to the Xerox's board. Xerox and Fujifilm reopened discussions in April over the merger to consider increasing financial consideration for Xerox shareholders. Additionally, in April, a judge temporarily blocked the deal saying the transaction was negotiated by "massively conflicted" CEO Jacobson. The company reached an agreement with Icahn and Deason to resolve the proxy contest and ongoing litigation in May, however, that agreement expired as Xerox believed it had the flexibility to renegotiate the deal with Fujifilm. The company also filed an appeal against the court's decision to block the deal in May but ultimately lost that appeal. Additionally, Xerox was reportedly approached by Apollo Global (APO) over a possible takeover and Icahn and Deason issued a statement saying they would consider a $40 per share or more cash bid.

ANALYST COMMENTARY: JPMorgan analyst Paul Coster downgraded Xerox to Neutral from Overweight as he believes it is unlikely that the new board will find an alternative acquirer for Xerox in the next few months after the company terminated its planned merger with Fuji-Xerox. Meanwhile, he sees Xerox being at risk of losing key enterprise accounts and sees more risk, particularly for the JV with Fuji-Xerox.

PRICE ACTION: Shares of Xerox fell 8.8% to $27.52 in morning trading.