The acquisition of an interest in defense or dual-use businesses could trigger reporting and approval requirements under applicable FDI regimes, depending on the nature and level of investment. FDI reviews consider whether a transaction could pose national security risks, including in relation to the reduction of critical capabilities and the leakage of classified information.
In the U.S., the FDI screening process is administered by the Committee on Foreign Investment in the United States (CFIUS), which has broad authority to review transactions that could result in foreign control of a U.S. business.
Certain non-controlling but non-passive investments in scope for CFIUS
CFIUS screening also applies to certain non-controlling but non-passive investments in “TID U.S. businesses” (which involve critical technologies, covered investment critical infrastructure (e.g., critical telecommunications, financial systems, etc.) or sensitive personal data), and transactions that involve real estate in proximity to certain U.S. government and military facilities. A CFIUS filing may be mandatory when a foreign investor acquires an interest in a TID U.S. business.
The Defense Counterintelligence and Security Agency (DCSA) addresses FOCI (foreign ownership, control, or influence) when a foreign person has the power, directly or indirectly (whether exercised or not) to direct or decide matters affecting the management or operations of a U.S. company that possesses a facility clearance, classified information, or classified contracts (we explore the issues surrounding classified information and security clearances in more detail here). A U.S. company determined to be under FOCI is unable to perform classified work unless and until effective security measures have been put in place to negate or mitigate FOCI to the satisfaction of the DCSA.
The International Traffic in Arms Regulations (ITAR), administered by the Directorate of Defense Trade Controls (DDTC) within the U.S. Department of State, impose specific requirements (including registration) on U.S. companies that manufacture, export, or broker defense articles, defense services, or related technical data listed on the United States Munitions List (USML). When there is a material change in registration information, or a foreign person or entity acquires ownership or control of a DDTC-registered company, the company must notify the DDTC in writing.
UK regulations impose mandatory reporting requirements
In the UK, the National Security and Investment Act (NSIA) governs the screening of foreign (and domestic) investments in sensitive sectors. Certain acquisitions of targets that deal in or manufacture defense items fall within the scope of reporting requirements under the NSIA and are subject to mandatory notification to, and prior clearance by, the UK government, coordinated through the UK’s Investment Security Unit.
Transactions that do not obtain requisite clearance in advance are deemed legally void in the eyes of the UK courts, with acquiring parties potentially subject to fines, and in certain circumstances, criminal sanctions. Transactions considered to give rise to a risk to UK national security may be unwound if already completed, cleared subject to remedies, or prohibited.
In the European Union, Regulation (EU) 2019/452 establishes a cooperation and coordination framework for the screening of foreign direct investment on security or public order grounds, which specifically includes defense and dual-use items such as AI, quantum computing, and semiconductors.
Screening decisions remain the exclusive competence of member states, but the regulation enables the European Commission and other EU countries to review and comment on transactions that raise cross-border concerns. In response to the regulation, all member states have incorporated FDI screening mechanisms into their national legislation. Failing to comply with the applicable requirements could result in transactions being prohibited or unwound.
Many EU member states’ rules capture minority investments
Across EU member states, many national screening protocols capture minority stakes. Spain for example has a dedicated defense FDI regime triggered at a 5% ownership threshold that is applicable to any non-Spanish investor, including EU nationals. The Spanish government may impose a diverse range of remedies in defense transactions, including requiring foreign buyers to accept Spanish co-investors, implement firewalls to protect sensitive information or assets, and mandating that directors be Spanish nationals.
In Australia, the country’s Foreign Investment Review Board (FIRB) conducts enhanced reviews of overseas investments into businesses with defense or military applications, particularly for foreign-government-linked investors. Here, a mandatory notification and approval may be required prior to acquiring stakes as low as 10%, with no minimum dollar investment threshold, and for certain investors prior to starting a business that proposes to operate in the defense space.
The identity of private equity funds’ limited partners presents a potential regulatory obstacle. Many FDI regulators look through a fund’s structure to examine the nationality and profile of underlying LPs, on the basis that those providing capital may exercise influence regardless of formal voting rights.
Early assessment of potential risks is vital for investors
Investors exploring opportunities in the defense sector should conduct early, rigorous self-assessment via scoping out likely FDI requirements and modeling the range of possible outcomes, including governance restrictions that may limit synergies or information flow. Particularly in the U.S., a sophisticated government affairs strategy, including lobbyists engaged before the deal, has become a feature of the market under the current administration.
Conditionality in transaction documents must be carefully drafted: hell-or-high-water clauses applying to FDI notifications are generally resisted by acquirers given the unpredictability of government-imposed conditions, and sellers and buyers must negotiate how to distribute regulatory uncertainty accordingly. Investors must also think about their exit options from the outset; the pool of eligible buyers for businesses considered relevant to national security is likely to be narrower than in other sectors, with FDI restrictions imposing an additional hurdle. As a result, we are seeing increasing interest in public listings as an exit option, an issue we explore in more detail here.
Merger control processes add further complexity
Alongside foreign direct investment screening, merger reviews and, in the EU, the Foreign Subsidies Regulation (FSR), may also be applicable.
For private capital investors, merger control assessments may apply to firms pursuing bolt-on strategies. At one level, defense deals are assessed like any other transaction, with antitrust authorities focused on the impact of transactions on competition.
However, in Europe the focus on defense preparedness has seen the EU Commission become more receptive to arguments about resilience when analyzing deals (i.e., also considering the impact of transactions on the robustness of the European defense supply chain, access to key inputs and the ability of companies to withstand shocks).
The Commission is currently conducting a review of its merger guidelines, with competitiveness, innovation and supply chain resilience identified as core themes.
The recently published draft revised guidelines go further than prior practice by explicitly recognizing that, in certain circumstances, consolidation may contribute to security of supply, industrial scale, and the ability of European firms to compete effectively in global and technologically dynamic markets, including in strategically sensitive sectors such as defense.
This represents a shift in emphasis from the traditional framework, under which such considerations were primarily assessed as efficiencies invoked to rebut identified harm. While the draft guidelines do not change the underlying legal standard, they suggest a more integrated approach in which potential pro-competitive effects are assessed alongside theories of harm as part of the overall competitive analysis.
As we explored in our recent alert, this evolution may allow parties to proactively frame transactions in terms of their contribution to scale, innovation and resilience, rather than relying on these arguments only at a later stage.
With that said, merger assessments remain anchored in established principles, and the Commission continues to require robust, verifiable evidence demonstrating that any claimed benefits are merger-specific and sufficient to offset a reduction in competition. In practice, the evidentiary bar remains high.
In defense transactions, this evolving approach is also reflected in longer pre-notification phases and earlier engagement on potential remedies, particularly where markets are already concentrated and/or strategic capabilities or supply chains are at issue.
In the U.S., the Hart-Scott-Rodino merger filing process underwent a significant overhaul in early 2025 with the introduction of a revised form that required substantially more information than under the previous regime.
Earlier this year, the old, shorter form was temporarily reintroduced as the Federal Trade Commission (FTC) appealed a lower court decision that it had overstepped its rulemaking authority.
At the same time, merger filings for qualifying transactions (which include some technology deals) are now sent to the Department of War as well as being reviewed by the Department of Justice and FTC. It is not yet clear how the DOW uses the information it receives.
Global coordination across applicable regimes is critical to successful execution
The FSR review process is designed to investigate and counteract distortive subsidies granted by non-EU governments. The term “foreign subsidy” covers any financial contribution from a non-EU government or public entity that confers a selective benefit on a business operating within the EU single market. “Financial contributions” is defined broadly to include grants, loans, tax incentives, and even the provision of goods or services at market terms.
FSR mandates pre-notifications for large mergers (where the target or one of the merging parties has a turnover within the EU of more than EUR500 million and the parties received combined foreign financial contributions (FFCs) of more than EUR50m in the previous three years) and significant public tenders (more than EUR250m in contract value, with the bidder receiving FFCs exceeding EUR4m).
Against this backdrop, global coordination is critical: FDI, merger control, and FSR filings across jurisdictions must not fall out of step, and remedies across regimes and countries must be aligned.
