Capital Gain or Holding Gain
A capital gain is the increase in the monetary value of a property such as a share, a bond, land, an antique, or any other asset, which leads to a profit when the property is sold. A capital gain deduction will be available for certain types of capital gains such as the sale of qualified small business corporation shares or qualified farm property. The capital gains deduction is set at a lifetime amount of $750,000 for individuals only.
Confidentiality Agreement
A confidentiality agreement prevents the divulgation of confidential information (financial results, important contracts, client lists) submitted to the buyer in the context of due diligence and negotiations.
Due Diligence Review
A buyer or a successor has the right to have various areas of to the company verified by his own experts in order to determine if what the seller has said is true, if the goods are truly what he thinks he is buying, and if there are no hidden defects or lawsuits against the company, to name a few. The due diligence review usually covers the following areas: operations, intellectual property, goods, human resources, and the legal, accounting, tax, and environmental aspects.
Equity is the value of the shares held by the owners.
Estate Freeze

When a company is sold or transferred, the shares of the owner-manager are valued, and this value is determined and set at a specific time. Following this, a new definition of the owner-manger’s shares and a redistribution of equity among the new owners of the company occurs.

Several methods are used to institute a freeze and each method has its particularities. The “classic” method entails a transfer of the owner-manager’s shares to a management company that becomes the owner of the company. The management company issues new, non-participating shares to the owner-manager in exchange for his old shares. The value of the new, non-participating shares will be equivalent to the value determined for the old shares at the time of the freeze. Usually, the new, non-participating shares are controlling shares. The management company will also issue new participating shares to the designated beneficiaries of the estate. The new participating shares are the shares that will benefit from the increase in the company’s value in the future.

In setting the value of his shares at the time of the freeze, the shareholder sets the amount of the capital gain that he will realize on his new, non-participating shares. The tax on this capital gain will be payable upon disposition of the shares.

Financing Package
A grouping of financial products, with appropriate conditions attached, that ensure the financing of the transaction.
Letter of Interest or Letter of Intent
A letter in which a party expresses an interest in transacting with the other party. It might be a question of a potential buyer interested in purchasing a company or a financier interested in offering a certain type of financing. The provisions of a letter of interest are not usually commitments by the parties, but the provisions allow the establishment of the basis on which the parties enter into negotiations with a view to a final agreement.
Leveraged Buyout (LBO)
A situation where a buyer gains control of a company by taking out loans that are based on the borrowing capacity of the company being purchased. Most often, the assets of the purchased company are used to secure the loans taken by the buyer. These loans are generally repaid with the liquidity of the acquired company.
Offer Letter
A letter in which the parties commit to making a transaction if certain conditions are met. The offer letter usually sets out the price, the payment terms, such as timeline and other conditions, such as obtaining financing, executing a due diligence review, the duration of the agreement, and the role the current owner will play in the transfer (e.g., special advisor for a period of time, member of the board of directors, etc.).
Representation and Guarantee Clauses
Clauses that bind the seller to the buyer on certain points that form the basis of the buyer’s decision. For example, the accuracy of the financial statements, the validity of the transferred licenses and contracts, the ownership of the assets, divulgation of all liabilities, including environmental liabilities, etc. These clauses are combined with an obligation by the seller to indemnify the buyer in case of inaccuracies of the facts included in the clauses for a period agreed upon by the two parties.
Sales Contract
A legal document that sets out the conditions of the agreement between the seller and the buyer. It results from a sometimes long and arduous negotiation over the company’s value, the acquisition strategies, financing, sales price terms and conditions, guarantees given, the indemnifications pertaining to the representation and guarantee clauses as well as to agreements concerning employees, leases, debt, current legal concerns, and non-compete clauses.
Subscription Agreement
A commitment made by an investor to buy a participation (most often shares) that a company intends to issue. This agreement also includes representation and guarantee clauses.
Shareholding designates both the shareholders of a company and the share classes (common, preferred, voting, controlling).
Shareholder Agreement

An agreement singed by some or all of the shareholders of a company that specifies the conditions of their partnership, covering points such as the signatures of the bankers, shareholder withdrawal from the business, decision making within the business and the shareholders rights to exercise votes, the distribution of shares, dissolving the shareholding, the effect of death or disability, right of first refusal, drag along rights, reverse drag along rights, conflict resolution, as well as non-compete, non-solicitation, and confidentiality clauses.

Some of the terms listed above are defined as follows:

Right of first refusal: a legal mechanism under which a right is granted to shareholders to buy shares of the company owned by another shareholder when a third party makes an offer to purchase them.

Drag along right: a right granted to majority shareholders that obliges minority shareholders to sell their shares to a third party if the purchase offer of the third party targets a certain percentage of the shares of the company.

Reverse drag along right: a right granted to minority shareholders that obliges a third party to purchase the shares of the minority shareholders when the purchase offer of the third party targets a certain percentage of the shares of the company.

For more information see: Gagnon, Nathalie and Lapointe, Caroline, (BCF s.e.n.c.r.l.), “Convention entre actionnaires et stratégies de transfert d’entreprise ”, APFF, November 27, 2003.


An estate created to allow an owner-manager (predecessor) to entrust the holding gain of his shares to administrators (trustees) for the benefit of beneficiaries that he designates. The trustees must act in accordance with the conditions and wishes expressed in the constituting documents of the trust.

In a family trust, often called discretionary, the current owner-managers can freeze (see estate freeze above) the value of his shares and direct the future holding gain into the trust. The owner-manager usually names himself, his children, his spouse, and even his grandchildren as beneficiaries.

The relationship between the trustees and the beneficiaries is managed by the Code civil du Québec, which grants the trustees real control of the assets, which must be administered in the best interest of the beneficiaries. The trustees determine the time and place for the distribution of revenue generated by the assets, as well as the assets themselves, based on the wishes of the owner-manager.