In the context of acquisitions and takeovers, it is an arrangement that is designed to entice or facilitate a control transaction in order to shun away or block an actual or potential attempt to propose another “unfriendly” control transaction. Such an arrangement can help a target firm secure a proposal (from a third party) by protecting against costs that would not be recoverable if the transaction was not entered into.

In other words, the arrangement may provide assurances to a bidder (hence potentially reducing its risk) that the target firm will not proceed with the proposed transaction. Concurrently, it may also deter competition amongst bidders (current and potential) from reaching significant proportions that would otherwise force the firm’s shareholders to accept a bid. In the situation that the bid is not accepted, the value of the company may be substantially undermined.