Defence Tech M&A – Key Legal Insights in a High Stakes Market

This blog provides a high-level overview of legal due diligence considerations for investors considering investing in the defence technology sector from an EU law perspective.

At the 2025 NATO summit in the Netherlands, member states committed to increase annual defence spending to 5% of GDP by 2035. NATO and the EU’s push for record-breaking defence investments[1] is reshaping the landscape, positioning the defence technology sector on a critical path for innovation and growth.

For investors, this presents an opportunity to benefit from the geopolitical momentum, tap into available public funding and capitalize on the accelerating modernization of a traditionally conservative industry. However, successful transactions in defence tech require navigating a complex web of legal, regulatory and security hurdles unique to this sector. 

Unlocking Government Contracts

Many defence technology companies hold valuable contracts with governmental authorities. These agreements often contain narrow provisions on transferability: changes in ownership may require advance notification or explicit consent from government bodies, reflecting the critical and sensitive nature of defence-related goods and services. 

Additionally, government contracts are frequently awarded through public tenders governed by stringent EU directives (such as Directive 2009/81/EC) and national procurement laws. Items to consider in your due diligence: Does the target company compete in public tenders? Is it compliant with procurement requirements? Will a change of ownership trigger new tender procedures for any key contracts?

Intellectual Property: A Strategic Edge to be Handled with Care

Intellectual property (IP) is a core value driver in any tech transaction, but in the defence tech sector, it often intersects with sovereign controls, licensing obligations, and restrictions on foreign access to such IP.

If the target has developed IP supported by government or EU funds, be prepared for strings attached: use and transfer may be limited, especially when it comes to post-acquisition ownership by non-EU entities. Untangling these restrictions can be critical to securing the full value of the deal.

Classified Information & Cybersecurity: The Double Security Hurdle

Dealing with defence tech means dealing with secrets. Every EU country runs its own classified information regime, locking access to those with proper security clearance—a process that can be lengthy and, in cross-border deals, multiply your administrative headaches. Investors and advisors may have to secure clearances in multiple jurisdictions, adding complexity and potentially slowing transaction timelines.

But it’s not just about classified files. Defence tech companies involved in critical infrastructure or processing sensitive data face robust cybersecurity safeguards, including under EU Directive 2022/2555. Due diligence should focus on whether the relevant target group is subject to such EU and national cybersecurity laws and has internal compliance, risk assessment and incident reporting programs in place as required under applicable cybersecurity laws.

Export Controls: Navigating the Red Tape

Exporting defence tech is anything but straightforward. Both EU-wide and member state rules apply. While the export of conventional military goods and technologies remains under the jurisdiction of EU member states, the export of dual-use goods (those with both civilian and military applications) from the EU requires an export license under EU law.[2] Member states may extend the scope of items which require export licenses for specific strategic industries. The Netherlands, for example, regulated the export of dual use items in the semiconductors, quantum computing and additive manufacturing equipment industries.

Items to consider in your due diligence: Does the target export outside the EU? Are the required export licenses in place? Have there been any investigations and/or proceedings involving export regulations? Will a change of ownership trigger new licensing obligations or allow authorities to revisit approvals?

State Aid: Unlocking (and keeping) Government Backing

Many defence tech innovators have tapped into government funding or prestigious EU initiatives such as the European Defence Fund (EDF) and the European Defence Industrial Programme (EDIP). Although dual-use technologies are typically more state aid-friendly than conventional military applications, exemptions from EU rules are strictly applied by EU courts and regulators. If state aid is wrongly used, companies face claw-back. It is important to map all public funding, monitor compliance, and assess whether ownership changes might trigger repayment or stricter funding conditions.

Beyond Due Diligence: Transactional Hurdles

In addition to (legal) due diligence considerations, investors in defence tech are facing legal and commercial challenges when structuring the transaction.

Key issues at the deal-structuring stage include:

• Securing Internal Buy-In: Obtaining necessary approvals from key stakeholders, especially in sponsor-backed deals, can be complex and time-consuming.
• Financing the Future: Accessing debt financing for defence investments presents its own set of hurdles, with lenders scrutinizing regulatory and reputational risks linked to the sector.
• Regulatory clearances: Obtaining approval from regulators, such as foreign direct investment (FDI) authorities, can be unpredictable both from a deal certainty and timing perspective. 

For a deeper dive into the regulatory landscape and how it influences defence sector deals, check out our blog post: “Armed for opportunity: navigating investment and compliance in the Dutch defence sector” which highlights key regulatory issues for investors considering the Dutch defence sector.

For further information, or in case of questions, please contact any of the authors.

References

[1] On 17 June 2025, the European Commission adopted the Defence Readiness Omnibus (DRO), a comprehensive package aimed at establishing a defence-readiness mindset across the EU facilitating up to €800 billion in defence investments over the next four years, enabling Member States and industry to respond swiftly and effectively to growing threats. The DRO followed on earlier initiatives such as the European Defence Fund's annual Work Programme for 2025 of the European Defence Fund, allocating €1.065 billion for collaborative research and development in the field of defence and the European Defence Industry Programme, allocating €1.5  billion to defence investments in the EU over the next few years.

[2] Annex I of the EU Dual-Use Regulation (2021/821) provides a list with dual use items which are subject to export licenses such as certain drones, high-precision machine tools, laser systems, VPN software and encrypted storage.