Executive Summary
- What’s new: Europe’s defence sector is undergoing unprecedented transformation, and competition authorities are recognising this evolving landscape in their competition assessments.
- Why it matters: A broader policy lens means that transactions and collaborations may be reviewed more favourably where they support defence readiness and sovereign capability. The evolving regulatory landscape provides both unprecedented opportunities and heightened regulatory challenges for corporate acquirers, private equity and strategic investors in the defence sector.
- What to do next: In this environment, successful dealmaking and investments require an integrated approach across merger control, foreign subsidies, foreign direct investment and national security screening frameworks, as well as approvals under the EU’s state aid rules. Long-standing conventions among allied investors will not always continue to stand, as Europe looks towards independent resilience. For collaborations that do not constitute notifiable transactions — such as joint R&D, joint bidding, production and standardisation efforts — a self-assessment may be necessary to ensure compliance with general competition law requirements.
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A Policy Shift Towards Defence Investment and Scale
Mounting geopolitical tensions and heightened security concerns have highlighted the need for greater scale, resilience and autonomy in Europe’s defence sector. This has prompted a fundamental policy shift.
The European Union’s Defence Readiness 2030 strategy — launched in March 2025 under the broader ReArm Europe plan — aims to mobilise up to €800 billion in defence investment by 2030. Under this overarching policy direction, the EU introduced a Defence Readiness Omnibus (Omnibus) in June 2025 that signalled that the European Commission (EC) will explicitly reflect the evolving security and defence landscape in its competition assessments alongside existing competition rules.
In practice, this means that the EC is likely to weigh broader security objectives alongside traditional competition concerns, potentially allowing for greater corporate collaboration and consolidation.
In the UK, the Ministry of Defence (MoD) published its Defence Industrial Strategy in September 2025, positioning defence as an engine for economic growth and innovation. The government followed this in June 2026 with its Defence Investment Plan, which includes a £298 billion investment in defence funding over the next four years.
The Defence Investment Plan commits to raising NATO-qualifying spending to 2.7% of gross domestic product (GDP) by 2027-28 and to 3.5% by 2035 — a commitment reiterated by new Prime Minister Andy Burnham on his first day in office. It also:
- Proposes a new defence offsets regime (subject to consultation).
- Signals procurement reform through a segmented acquisition model and accelerated commercial pathways.
- Seeks to attract private capital through clearer demand signals and a forthcoming Defence Finance and Investment Strategy.
The UK government gave the Competition and Markets Authority (CMA) a “strategic steer” in May 2025 to prioritise growth and investment, including in critical sectors such as defence. Reflecting this, the CMA’s September 2025 Scale-Ups and Competition Policy discussion paper highlights the defence sector as a key area where competition policy can support the scaling up of innovative firms in the UK.
The paper notes that “[f]urther work could include targeted market reviews, more in-depth market studies and advocating for pro-competitive reforms directly to government.”
CMA Chief Executive Sarah Cardell noted in February 2026 that the CMA is assisting the MoD in identifying potentially anticompetitive regulations governing autonomous weapons and technologies.
Merger Control: A New Openness to Consolidation and Scale
The Omnibus confirms that the EC’s merger assessments will “give adequate weight to the changed security and defence environment” and “assess the overall benefits from enhanced defence and security within the Union leading to efficiencies.”
This signals that the EC is willing to consider the broader contribution of a merger to the EU’s defence readiness and strategic autonomy — particularly where mergers enhance the EU’s global competitiveness and resilience.
True to that theme, the EC’s revised merger guidelines (Draft Guidelines), issued in April 2026, provide that EU merger control should protect innovation and investment competition in a manner that supports resilience and accelerates industrial capabilities in defence markets. (For more on this topic, see our 5 May 2026 client alert “EC’s Draft Merger Guidelines Open New Arguments for Merger Parties.”)
According to the Draft Guidelines, transactions that may contribute to European competitiveness include those that:
- Secure access to critical inputs.
- Increase resilience.
- Enable defence projects to strengthen the internal market and European defence readiness.
The Draft Guidelines also recognise resilience as a potential source of efficiencies. Mergers relating to access to critical inputs, reducing exposure to supply chain disruptions or creating products resilient to external shocks may be capable of substantiating an efficiencies defence on this basis.
In practice, transactions that might previously have raised concerns due to high market shares or vertical integration may be assessed more favourably.
The Draft Guidelines also introduce an “innovation shield”: criteria under which the EC will not in principle find competition concerns. These thresholds are likely to be valuable to defence sector acquirers targeting small startups or scale-ups offering unique technologies or patents. The final revised guidance is expected by the end of 2026.
The trend towards swift clearance of defence transactions is already visible at both the EU and national levels. For example, the Leonardo/Iveco transaction — a €1.7 billion acquisition of Iveco’s defence vehicles division — received unconditional merger control clearance from the EC in March 2026, which the EC described as another example of it “swiftly approving a transaction that supports the EU’s defence sector without harming competition in Europe.”
The CMA is also shifting its policy. Notably, in June 2026, the authority published revised draft guidance on merger efficiencies. The guidance expressly recognises that mergers can enhance the ability or incentive of firms to innovate and invest in research and development (R&D) — including by combining complementary capabilities — and that such dynamic efficiencies may spur rivals to respond, strengthening the competitive process.
The CMA’s openness to efficiencies that materialise over longer time frames and regard for industry-specific investment and innovation cycles may provide additional arguments for defence transactions where scale and technological integration are central to the deal rationale. The final revised guidance is expected later in 2026.
Foreign Direct Investment: Prioritising Sovereign Capability and Resilience
Against the background of increasingly unpredictable transatlantic relations, European governments are using foreign direct investments (FDI) to bolster and defend their sovereign capabilities.
Investors from allied countries, including the US, are facing higher levels of mitigation in defence and related sectors, such as the UK government attaching conditions to Australian Pen10’s acquisition of Amiosec, a cybersecurity business serving government customers.
Earlier this year, the Dutch government blocked US-based Kyndryl’s proposed acquisition of Solvinity, a digital ID provider. That was the first US block for the Dutch; France, on the other hand, has a history of blocking US investments in the defence sector — e.g., Flowserve’s abandoned bid for Segault (which supplies components for French nuclear submarines) and Teledyne’s blocked proposal to acquire Photonis (a maker of night vision equipment).
Where deals are approved, typical security and governance requirements are being supplemented with requirements to maintain supply to domestic defence customers and to keep manufacturing, development and R&D capabilities in-country.
European authorities now also routinely scrutinise US export controls and International Traffic in Arms Regulations (ITAR) exposure created by transactions in an effort to avoid European technology falling within the net of US trade controls.
As seen by the failed talks for the UK to participate in the EU’s €150 billion Security Action for Europe (SAFE) funding programme, Europe’s hardening of its approach is not limited to the US.
Foreign Subsidies Regulation: First Two Defence Transactions Cleared
Beyond merger control and FDI, investors in the defence sector may face scrutiny under the EU’s Foreign Subsidies Regulation (FSR), a tool designed to prevent distortive subsidies from non-EU governments from affecting M&A and public procurement procedures.
The FSR imposes mandatory notification and approval requirements for acquisitions of businesses with significant EU turnover and for large EU public tenders. It also gives the EC extensive powers to launch ex officio investigations.
Since the regime entered into force in mid-2023, the vast majority of M&A FSR reviews have been unproblematic, and the EC unconditionally cleared the first two defence transactions under the regime in early 2026. The EC’s FSR guidelines also confirm that, in complex cases, defence policy considerations may be taken into account to ensure that the regulation does not undermine the EU’s own policy goals or security interests.
Antitrust: Encouraging Competitor Cooperation
While collaborations between competitors remain subject to the prohibition on anticompetitive agreements and information exchanges, the EC’s Omnibus shows a willingness to provide tailored antitrust guidance for defence-sector cooperation projects with a view to facilitating cooperation that supports defence objectives.
Future tailored antitrust guidance could be particularly relevant for collaborations aimed at quickly scaling up production or engaging in joint procurement of raw materials — areas where individual companies may lack the capacity to act alone.
When evaluating such agreements, the EC intends to consider the efficiencies generated, including contributions to defence readiness and supply chain resilience. This has the potential to create greater legal certainty for companies seeking to pursue joint projects that address critical defence needs.
The CMA released new guidance in August 2025 aimed at helping businesses understand how to collaborate without breaching competition law. The CMA has also indicated, in its Scale-Ups and Competition Policy discussion paper, the potential for developing sector-specific guidelines to facilitate cooperation amongst market participants in the defence ecosystem.
Despite the recognition of sector-specific needs, competition authorities remain willing to take enforcement action against anticompetitive conduct. The CMA confirmed in November 2025 that it is supporting the MoD in reviewing defence contracting practices and has offered to deploy artificial intelligence (AI) tools and data science techniques to help identify bid-rigging in public procurement — a key risk area in defence contracting.
Penalties can be severe: fines of up to 10% of worldwide turnover and debarment from public contracts for up to five years. For example, the EC imposed fines on Diehl in September 2023 for its involvement in the military hand grenades cartel, in which the company was found to have allocated territories with its competitor RUAG.
State Aid: Expanding the Scope for Government Investment
Significant public funding is being made available for the defence sector, accompanied by adjustments to the regulatory framework governing such support. Key EU funding tools include the:
- Important Projects of Common European Interest (IPCEI) framework, which supports large-scale, cross-border initiatives.
- Strategic Technologies for Europe Platform (STEP), which channels investment into critical technologies.
- European Defence Fund, which co-finances collaborative defence R&D.
According to European Defence Agency data released on 16 July 2026, EU governments are expected to spend an overall 2.4% of GDP on defence in 2026, reaching €454 billion — a 9% increase in real terms from 2025.
Funding mechanisms to support defence and critical technologies may need to be notified to, and approved by, the EC under the state aid rules, which prevent member states from conferring unfair financial advantages to specific companies so as to ensure a level playing field across the single market.
The Omnibus seeks to support the rapid scale-up of defence production with the help of exemptions or relaxations in state aid rules. Notably, government funding of projects that can demonstrate they are essential to national security interests — including support for military infrastructure — may benefit from exemptions or receive administrative priority in the approval process.
State aid cases linked to defence readiness that are not exempt will still receive administrative priority, reflecting the urgency of strengthening the EU’s defence capabilities.
Article 346 of the Treaty on the Functioning of the European Union (TFEU) provides an exemption for measures taken to protect essential national security interests.
In practice, this means that noneconomic support — including for military infrastructure, core military functions and defence production capabilities — may fall within the scope of the exemption and be provided without prior notification to the EC. As part of its push towards a defence single market, the EC is seeking to incentivise less frequent reliance on Article 346.
Additional adjustments to the rules may be forthcoming. In its Defence Readiness Roadmap published in October 2025, the EC indicated that it may “modernise its approach under State aid rules in the sector and possibly provide guidance,” including potentially sector-specific exemptions or streamlined procedures for defence-related projects.
Any subsidies from governments or public authorities in the UK may also be subject to the UK’s parallel subsidy control regime under the Subsidy Control Act 2022. This regime involves a self-assessment based on statutory principles rather than mandatory, ex ante clearance.
Looking Ahead
Competition authorities across Europe are recalibrating their frameworks to give greater weight to defence readiness, supply chain resilience and innovation. This policy shift presents an opportunity for companies and investors to pursue strategic transactions, investments and collaborations that support EU and UK defence objectives, while remaining vigilant about compliance requirements and the evolving regulatory environment.
Early and integrated regulatory planning across the merger control, FSR, FDI and state aid frameworks remains essential.
Senior knowledge strategy lawyer Elizabeth Malik contributed to this client alert.
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This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.