What it is:
A yellow knight is a company that backs out of an attempt to take over another company.
How it works/Example:
Let's assume Company XYZ wants to acquire Company ABC. Company ABC feels that Company XYZ is a hostile bidder and sale to Company XYZ would not be a good thing.
Company XYZ, fearing a legal battle and little support from shareholders on both sides, backs off. That is, it becomes a yellow knight. Instead, Company XYZ comes back to Company ABC on more friendly terms and proposes a merger.
Why it matters:
Yellow knights are yellow because the color is associated with cowardice.