Rollover equity is the portion of a seller's sale proceeds that, instead of being paid out in cash at closing, is reinvested as shares in the buyer's newly formed acquisition vehicle — so the seller keeps a minority stake and shares in the company's future growth alongside the new sponsor.
The phrase itself comes from US buyout practice, and it's used the same way at the negotiating table in Canadian deals — but the two countries get the seller to a tax-deferred outcome through different statutory routes, so the term is not a defined one in Canadian corporate or tax law. Sponsors ask for it because a seller with real money still on the table has a direct financial stake in the business performing after closing, not just a clean exit.
In a Canadian deal the rollover portion is typically structured as a transfer of eligible property to the buyer's acquisition corporation in exchange for shares, jointly elected under ITA s. 85(1). The elected amount is deemed to be both the seller's proceeds and the corporation's cost for the rolled property, capped at the property's fair market value, so no gain is recognized on the rolled portion at the time of the deal — only on the cash and other non-share consideration (the “boot”) received alongside it.
Once the seller holds shares in the buyer's NewCo alongside the sponsor, their rights as a minority holder — board representation, drag-along and tag-along, what happens on the sponsor's eventual exit — are usually set out in a unanimous shareholder agreement. Under CBCA s. 146, such an agreement restricting the directors' powers “is valid,” and a later purchaser of shares subject to it is “deemed to be a party to the agreement” — which is exactly the tool that governs a rollover seller's minority position until the sponsor eventually exits.
A private equity fund buys 100% of a CCPC's shares for $20,000,000 total consideration, structured as $15,000,000 in cash and $5,000,000 of rollover equity in the fund's new acquisition corporation. The founder and the acquisition corporation jointly elect an amount under s. 85(1) equal to her adjusted cost base for the rolled portion, so no gain is triggered on the $5,000,000 she reinvested — only on the $15,000,000 cash portion. Her resulting minority shares in NewCo become subject to a unanimous shareholder agreement under s. 146 governing her rights until the fund exits.
See also: Section 85 rollover · Share purchase agreement · Vendor take-back note.
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