Nissan Motor Co have signed a basic agreement with Mitsubishi Motors Corp to take a 34% stake in the company, extending an existing alliance between the companies.
The Japanese car manufacturers already cooperate on development and manufacturing.
Carlos Ghosn, chief executive and president of Nissan, said: “This is a breakthrough transaction and a win-win for both Nissan and Mitsubishi Motors. It creates a dynamic new force in the automotive industry.”
Osamu Masuko, chairman of the board and chief executive of MMC, said: “This agreement will create long term value needed for our two companies to progress towards the future. We will achieve long term value through deepening our strategic partnership including sharing resources such as development, as well as joint procurement.”
Under the terms of the transaction, Nissan will purchase 506.6 million newly-issued MMC shares at a price of 468.52 yen per share and become the largest single shareholder.
Mitsubishi is facing the prospect of massive fines in relation to the fuel scandal which, it has admitted, could date back 25 years.
It is also working on a plan to compensate customers.
Mitsubishi admitted on Wednesday that its false reporting on fuel efficiency may now extend to all the vehicles it sold in the Japanese market but insisted it had abided by mileage-test requirements for all cars sold abroad.
It had previously limited the cheating to smaller models in Japan after Nissan alerted the firm to test discrepancies.
Mileage fraud is a violation of Japan’s fuel efficiency law for cars because buyers are eligible for tax breaks if a vehicle model delivers a certain efficiency.
It said that in some cases engineers simply made up false readings.
Its Tokyo-traded shares have lost more than 40% of their value since the rigging emerged four weeks ago.
Mitsubishi is no stranger to controversy.
In 2004 it teetered on the edge of bankruptcy amid a series of huge recalls linked to a cover-up on historic defects including failing brakes and faulty clutches.
Its latest crisis comes amid widening concerns over irregularities among global car makers following Volkswagen’s admission that it cheated on diesel emissions tests.
The German company reported last month its first annual loss for two decades after its provision for the scandal increased to €16.2bn (£12.7bn).