Microsoft will hold about 17.6% equity stake in Nook Media while Barnes & Noble will own the remaining 82.4% stake.
Microsoft has invested $300m in Nook Media, a newly created subsidiary of book retailer Barnes & Noble.
The deal values Barnes & Noble's Nook business at $1.7bn and Microsoft has invested the amount in exchange of 17.6% equity stake, while Barnes & Noble will hold the remaining 82.4% stake in the joint venture.
NOOK Media business consists of the digital and college businesses of Barnes & Noble which operates 667 college bookstores throughout the US.
As per the deal, Barnes & Noble and Nook Media will now have a license for Microsoft's patents for the Nook eBook reader and tablet products.
The agreement will also see Barnes & Noble develop a Nook-branded e-reader app for use on Windows 8 PCs and tablets, including Microsoft's own Surface.
Barnes & Noble CEO William Lynch said: "As demand for digital content continues to increase, we are focused on bringing ground-breaking reading and learning content and technologies to more people in more formats than ever before, including the imminent launch of our exceptional NOOK reading application for Windows 8."
Microsoft in May 2012 said that it will invest $605m in a new subsidiary to be formed by the company's partnership with Barnes & Noble to enter into lucrative e-books market.
In September this year, Barnes & Noble had unveiled NOOK HD and NOOK HD+ tablets as alternatives to Amazon's Kindle Fire and Apple's iPad.