Amid geopolitical tensions and military conflicts, European security policy is undergoing a fundamental shift. More than ever, there is broad political consensus that Europe needs to strengthen its military capabilities to counter growing threats. Companies in the defense industry play a key role here, as it is their job to meet the high demand for armaments. Accordingly, the industry is experiencing a significant economic upturn, prompting interest from civilian companies. For such companies, entering the defense sector presents opportunities for growth – but there are also legal challenges associated with entering this highly regulated sector, with a number of specific issues from a variety of legal areas that should be considered.
Defense sector as a path to growth
Prominent figures from Germany’s industrial sector are calling for German industry as a whole to exploit its unused capacity in order to strengthen German defense, and are encouraging companies from outside the defense sector to embrace the special challenges posed by this business. This call to action has struck a chord for two reasons: Firstly, broadly integrating such companies into the defense sector helps boost the defense capabilities of Germany and its alliances. Secondly, companies not running at full capacity due to current crises in various industrial sectors have a strategic opportunity to develop their business. This could be of interest to the automotive industry and its suppliers, in particular.
Legal challenges in a highly regulated sector
Besides the opportunity to develop new areas of business, however, companies in the civilian industrial sector that wish to become part of the defense industry must also meet major challenges. In addition to addressing their corporate governance and ethical values, they will need to comply with numerous regulations. The defense and security industry is a highly regulated sector in which the influence of legislation and public authorities is uniquely intense and bears no real comparison with any other area of industry.
- Specific issues arise in public procurement, for instance. A large number of special rules apply to defense and security contracts, and these rules will be new even to companies whose prior experience in public contracts has familiarised them with public procurement processes and the associated mechanisms of legal protection. Additionally, exemptions are now increasingly being used to speed up procurement. The German Armed Forces (Bundeswehr) for example are more frequently relying on direct procurement – as they did in a case before Düsseldorf Higher Regional Court (decision of 1 December 2023, Verg 22/23), which we discuss in our German-language podcast Defense & Security Briefing – Verteidigungsvergaberecht | Gleiss Lutz. The advantage for the awardee is that it can be awarded a contract without having to go through a complex procurement procedure. In direct procurement, however, competitors risk being passed over. It is also harder for them to obtain injunctions against the award – even more so if they were not informed of the contract in the first place because transparency requirements were lacking (discussed in our German-language podcast, Defense & Security Briefing – Rechtsschutz bei Verteidigungsvergaben | Gleiss Lutz).
- As a contracting authority, the Bundeswehr is bound by public pricing law. In practice, therefore, companies concluding contracts with the Bundeswehr prepare their financial statements in line with public pricing law and frequently establish provisions in anticipation of possible pricing reviews or recovery claims after the contract has been concluded.
- With regard to the protection of classified information, companies that are entrusted with military developments must expect to have their employees subjected to security vetting. They also have to take security precautions if they come into contact with state secrets. The Handbook of Industrial Security (Geheimschutzhandbuch für die Wirtschaft) contains regulations on the handling of classified information that companies must observe when entering into contracts with the Bundeswehr, for example. These regulations aim to ensure that classified information is protected through technical and organisational measures and that only authorised persons are able to access classified information. There are also special security regulations on the use of IT (discussed in our German-language podcast, Defense & Security Briefing – Cybersecurity in der Verteidigungsindustrie (Teil 1) | Gleiss Lutz).
- Moreover, war weapons control regulations must always be borne in mind when producing armaments. Once a product falls into the category of war weapon, government permits are required. Manufacturing war weapons without a license is a criminal offence that can be subject to long prison terms. To avert such penalties, compliance with the relevant provisions is essential.
- Furthermore, if a company intends to work with other companies that may already be established in the defense sector, antitrust law must also be taken into account. Cooperations and joint ventures, which are subject to antitrust rules, are particularly widespread in the defense industry. It is necessary to avoid or justify any restrictions of competition in such cases. The limits for the exchange of competitively sensitive information among (potential) competitors must also be observed, and antitrust compliance must be established.
- Additionally, companies entering into armaments production must be aware of its potential impact on other business units. In terms of financing options, the defense industry’s compatibility with sustainability is a complex issue that has been gaining momentum, particularly over the past year. In the past, defense companies had generally been excluded from ESG funds. But in May 2024, the European Securities and Markets Authority (ESMA) issued guidelines (Guidelines on funds' names using ESG or sustainability-related terms) stipulating that funds which are designated sustainable may invest a share of 20% at will, excluding only ‘controversial weapons’, i.e. those prohibited under international law, such as cluster munitions.
- Moreover, private equity is traditionally underinvested in the defense and security sector, at least in Europe. There is great potential here, since private equity is said to have over USD 3.5 trillion in global dry powder, i.e. unallocated capital commitments from investors. However, investments in the defense and security sector are subject to foreign trade law restrictions on foreign funds and funds with a relevant foreign investor base that can apply not only upon entering an investment, but also when exiting it (see our German-language article Private Equity und die Verteidigungsindustrie, Europäische Sicherheit & Technik, 03/2025, S. 38). These restrictions also apply to all other M&A transactions with a cross-border component.
Conclusion
Entering the defense and security industry requires precise navigation through a complex regulatory environment. However, that shouldn’t deter companies from entering the defense industry if the time is right for them to establish themselves in an innovation-oriented and fast-growing sector.
Gleiss Lutz has been advising clients in this sector for decades and is a longstanding advisor of leading defense and security companies in Germany and abroad. As a Tier 1 law firm offering full service in all relevant sectors, Gleiss Lutz is perfectly placed to assist your company in this challenging sector. Our expertise in these and numerous other fields of law ensures that you will receive sound support in all relevant matters. Our targeted industry focus provides a comprehensive perspective, and solutions tailored specifically to each client’s needs. With Gleiss Lutz, you will have a reliable partner to help you master the challenges inherent to the defense sector.
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