Navigating European Regulatory Regimes for Defense Sector Investments and Deals

By James Marshall, Anna Lubberger, Carole Maczkovics, Alessandro Cogoni, Grace Kim & Geoff Wu on September 21, 2026

Executive Summary

Geopolitical developments are driving significant investment into the defense sectors in Europe. Acquisitions and investments in these sectors are likely to require multiple regulatory approvals across merger control, foreign investment / national security control, and foreign subsidies.
Merger control across the EU and UK is becoming more accommodating for defense deals, with the Commission’s new ‘theory of benefit’ framework and the CMA’s efficiencies guidance expressly recognizing defense readiness, innovation, and scale as part of the competitive assessment.
Foreign investment screening is moving in the opposite direction — the revised EU FDI Screening Regulation mandates screening in all Member States and even allied-nation investors face increased scrutiny, as recent cases demonstrate.
The EU’s Foreign Subsidies Regulation (“FSR”) is a further regulatory process that investors may need to navigate, introducing additional deal timing and execution risks.
Successful deal execution requires an integrated regulatory strategy addressing merger control, FDI screening, and the FSR in parallel — each with distinct logic, timelines, and risk profiles that may require extensive commitments to mitigate.

Link to I. Introduction — Defense as a Growth Sector I. Introduction — Defense as a Growth Sector

Russia’s full-scale invasion of Ukraine and widening tensions in the Middle East are reshaping Europe’s defense sector, reversing decades of declining military spending and driving accelerated rearmament. NATO allies have committed to raise defense spending to 5% of GDP by 2035[1], and the Commission’s ReArm Europe Plan aims to mobilize €800 billion. EU defense expenditure is estimated at €418 billion in 2025 and projected to reach €454 billion by the end of 2026.[2] Germany alone has significantly expanded its annual defense budget to €82.7 billion in 2026 and even €136.5 billion in 2028 (see also our alert “Investing in German Defense Companies: Key Regulatory Considerations” here).

The appetite for defense sector investment is clear. However, the regulatory landscape in Europe is complex and shifting, with regulators recalibrating their toolkits to adjust to the changing status quo. This article maps key regulatory frameworks that apply to defense sector deals, moving from merger control to FDI screening and the FSR, before considering the interaction between regulatory regimes.

Link to II. A More Pragmatic Merger Control Environment II. A More Pragmatic Merger Control Environment

Link to A. The European Commission’s Draft Merger Guidelines A. The European Commission’s Draft Merger Guidelines

European merger control policy has increasingly been discussed as an important limb of wider geopolitical and economic security policy. In recent years, however, that has changed: concerns about the implications of merger control policy on economic growth and attractiveness have become commonplace, as policymakers and commentators assess whether and how competition policy can be deployed to better support competitiveness and investment goals.

The highly influential Draghi report on EU competitiveness offered a critical view on Europe’s lack of global competitiveness. With respect to the defense sector, the Draghi Report stated that the sector is “too fragmented” and suffers from a lack of “standardisation and interoperability of equipment,” thus preventing the sector from scaling and achieving “strategic independence.”[3] The European Commission (the “Commission”) made similar findings, noting that while the EU defense sector is an “important driver of competitiveness” the sector lacked scale[4] and there was therefore a need to build an EU-wide defense market[5]. Draghi identified certain regulatory barriers to increasing European competitiveness, including merger control enforcement at the EU and Member State level. In an effort to address these overarching concerns, the Commission is making revisions to the substantive approach to merger review, which also addresses how the Commission intends to review defense deals.

On 30 April 2026, the Commission published the Draft Merger Guidelines, which will replace both the 2004 Horizontal Merger Guidelines and the 2008 Non-Horizontal Merger Guidelines with a single unified guideline.[6]

Link to 1. The ‘Theory of Benefit’ Framework 1. The ‘Theory of Benefit’ Framework

The centerpiece of the reform is the new “theory of benefit” framework, which elevates demonstrated merger efficiencies to a co-equal assessment alongside theories of harm. This represents a fundamental shift from the Commission’s historical approach, in which the so-called “efficiency defense” was available in principle but very difficult to satisfy in practice. The Commission now contemplates a broader range of beneficial effects, including longer-term dynamic benefits such as accelerated innovation, improved security of supply, and sustainability contributions. Importantly, the Commission has moved away from the rigid two-year horizon previously applied to efficiency claims—a development of particular significance for capital-intensive sectors like defense, where the returns on investment in new platforms and technologies frequently materialize over a decade or more.[7] This position has been reaffirmed in the Commission’s most recent economic study, published on 24 August 2026, which found that dynamic effects should be defined broadly to include the “overall effect of mergers on future product market competition,” particularly focusing on a deal’s impact on “investment, innovation, entry, and the prices and availability of new or improved products.”[8]

For the defense sector specifically, the guidelines introduce “defense readiness” as an expressly defined relevant parameter.[9] The Draft Merger Guidelines expressly outline the Commission’s support for defense mergers that strengthen “the internal market” and “European defence readiness, including security of supply, without creating excessive dependencies or resilience risks.”[10] It reflects the Commission’s intention to take security and resilience considerations into account when reviewing defense deals, particularly if the deal is considered to be “scale-enhancing.”[11] The Commission considers scale-enhancing mergers to be deals that lead to (i) innovation and technological progress, (ii) increased EU-wide market integration and expansion, or (iii) increased investment incentives and security of supply.

This signals that consolidation in defense—particularly transactions that combine complementary capabilities across Member States or secure critical inputs—may be viewed more favorably than under the previous framework. The Commission will give “adequate weight” to these arguments when assessing the “overall benefits from enhanced defence and security.”[12] The intellectual foundations were laid by the Draghi Report, which expressly called for reformed merger guidelines incorporating an “innovation defence.”[13] This position is reflected in the Commission’s economic study, which argued that parties to a transaction should be able to demonstrate how a merger enhances innovation, by allowing for the “pooling of resources to cover large fixed costs and compete globally.”[14]

However, while the landscape is generally more favorable for major transactions, Commissioner Ribera has been careful to stress that the guidelines represent “no blank check”: the evidentiary burden and substantiation requirements remain central.[15] In other words, merger control remains a critical regulatory hurdle which, although somewhat less steep, must nevertheless be cleared as part of a successful transaction strategy.

Link to B. The UK CMA — Growing Openness to Behavioral Remedies and Efficiencies B. The UK CMA — Growing Openness to Behavioral Remedies and Efficiencies

Across the Channel, the UK’s Competition and Markets Authority (“CMA”) is undergoing its own recalibration. Following the introduction of the Digital Markets Competition Regime, the CMA introduced the 4Ps (i.e., pace, predictability, proportionality and process) intended to support growth, investment and business confidence in the UK. This is also contained in the CMA’s most recent Annual Plan 2026-2027, outlining the CMA’s focus on becoming a driving force for greater innovation, productivity and security of supply.

Reflecting wider merger control enforcement trends, the CMA is also considering certain policy goals, in line with the UK government’s Strategic Steer which sets out the government’s growth-focused priorities aimed at promoting investment and competition in the UK, including strengthening the UK defense sector. Consequently, for transactions that meet broader UK policy goals, there is an increased opportunity for those benefits to be taken into account during a CMA merger review process.

Link to 1. Vodafone/Three: Investment as a Rivalry-Enhancing Remedy 1. Vodafone/Three: Investment as a Rivalry-Enhancing Remedy

In addition to the policy and procedural reforms to the UK’s merger regime, the CMA’s approach to complex cases in the last 12-18 months indicates there is increased opportunity for pragmatic remedies to address substantive competition concerns that may be raised in defense sector deals.

The landmark clearance of the Vodafone/Three merger marked a notable departure from the CMA’s traditional preference for structural remedies. The merger was cleared subject to behavioral commitments: a legally binding £11 billion network investment program and time-limited price caps.[16] The CMA accepted the argument that the investment commitment was itself rivalry-enhancing. While the CMA has been clear that the circumstances of the case were unusual, the decision indicates that investment commitments could serve as a potential remedy to competition concerns in similarly capital-intensive industries.

Link to 2. The CMA’s Efficiencies Guidance and Defense Engagement 2. The CMA’s Efficiencies Guidance and Defense Engagement

CMA CEO Sarah Cardell articulated the underlying philosophy: “every deal that is capable of being cleared either unconditionally or with effective remedies should be.”[17] The CMA’s revised Merger Assessment Guidelines, published on 3 September 2026, build upon this approach. It expressly recognizes dynamic efficiencies including innovation and investment in R&D, accepts that efficiencies may materialize over longer timeframes with regard to industry-specific investment cycles, and confirms that uncertainty about innovation outcomes will not preclude the assessment of efficiencies.[18]

The CMA’s engagement with defense specifically is also notable. Its September 2025 Scale-Ups and Competition Policy paper highlighted defense as a key area. In February 2026, Sarah Cardell noted that the CMA is assisting the Ministry of Defence in identifying anticompetitive regulations governing autonomous weapons. The CMA’s three-year strategy for 2026–2029 prioritizes driving economic growth, while the UK government’s January 2026 consultation proposes further reforms to “re-energise the regulatory system.”[19] The CMA’s openness to efficiencies over longer timeframes provides prospective parties with additional arguments for defense deals where scale and technological integration are fundamental to the transaction rationale.

Link to C. Recent Defense Deals Cleared by European Regulators C. Recent Defense Deals Cleared by European Regulators

Since 2025, at least seven defense deals have been unconditionally cleared by European antitrust regulators, with Germany approving at least five. While these deals did not raise any competition issues, European antitrust regulators expressly mentioned defense readiness and improving European competitiveness as factors taken into consideration.

In March 2026, Leonardo acquired Iveco Defence Vehicles. The Commission described the approval as “swiftly approving a transaction that supports the EU’s defence sector without harming competition in Europe.”[20]
In July 2026, the German Federal Cartel Office (“FCO”) approved two defense sector deals unconditionally, including Deutz AG’s acquisition of FFG Flensburger Fahrzeugbau Gesellschaft mbH.
In April 2025, the FCO cleared the MGCS JV for next generation tanks. President Mundt acknowledged that “the geopolitical situation has a direct impact on the defence industry” and emphasized the “largely complementary” nature of the parties’ activities.

Arguably the prospective combination of the space activities of Airbus, Leonardo and Thales, announced in October 2025, will be an important indicator of the Commission’s apparently greater openness to approving large-scale transactions in aerospace and defense industries.

Link to III. Regulatory Headwinds — FDI Screening and the FSR III. Regulatory Headwinds — FDI Screening and the FSR

Link to A. Tightening the screws on EU Foreign Investment Screening A. Tightening the screws on EU Foreign Investment Screening

While merger control may be becoming more pragmatic, foreign investment screening across Europe is intensifying rapidly, potentially creating more complexity for deals from a national security perspective. Transactions concerning sensitive sectors, such as defense, are likely to continue to be subjected to increased scrutiny, particularly in light of recent geopolitical developments.

Unlike merger control, there is no one-stop shop for FDI, meaning that a defense deal may be subject to each relevant national screening authority’s policy and political agenda. The EU is attempting to better harmonize foreign investment screening across Member States and also increase the Commission’s oversight of foreign investment screening throughout the bloc. The revised EU FDI Screening Regulation, which will enter into force in January 2028, imposes mandatory screening obligations on all EU Member States and establishes a mandatory minimum sectoral scope encompassing dual-use items and defense-related products and technology.[21]

While European competition authorities appear to be becoming more receptive to defense deals that support defense readiness, resilience and innovation, FDI screening authorities seem to be tightening the screws on defense deals – with ultimately the same aims. Given the expansion of FDI regimes within the EU and the different considerations and concerns at the national level, investors—even from allied countries—are likely to face prolonged review timelines and conditional approvals may become more common. Recent cases suggest that national caseloads are increasing. Aerospace, defense, national security and public order sector deals, particularly when they involve military products, critical inputs thereof and critical infrastructure, are likely to be at increased risk of intervention, as defense deals remain a core focus of FDI enforcement.

In 2025, Germany reviewed 339 FDI cases, including 13 in defense. In 2024, for example, German defense electronics manufacturer HENSOLDT’s cleared acquisition of German military services provider ESG was screened because of non-German shareholders of the acquirer. In May 2026, the Netherlands prohibited Kyndryl’s acquisition of Solvinity under its telecoms FDI regime, based on concerns over critical digital infrastructure. In the UK, defense generated 58% of notifications and 47% of call-ins in 2025/26, during which 1,324 notifications were received. While 95.6% of cases were cleared without remedies and defense-related Final Orders fell from nine to one, the ESCO Maritime/Ultra PMES case shows the potential severity of remedies, even for acquirers from allied countries. The approval was conditioned on a Government-nominated director, a Government-approved security officer and a Government divestiture right.

Although Leonardo’s acquisition of Iveco’s defense vehicles business was cleared swiftly under EU merger control and FSR review, media reports suggest that the Italian Golden Power review took considerably longer, requiring complex negotiations with multiple government ministries. This is because the transaction was closely linked to Tata Motors’ acquisition of Iveco’s commercial vehicles business—the Indian company’s clearance was conditioned on Leonardo acquiring the defense business and on (among other things) Tata maintaining domestic production and R&D operations and continuing to supply components, products, and services to Leonardo’s defense vehicles operations.

Based on the above developments, it appears that defense deals may benefit from a relatively more flexible approach to merger control enforcement, while at the same time geopolitics and domestic drive for rearmament may make the national security aspects of transactions more complex and susceptible to mitigation measures.

Link to B. The FSR B. The FSR

In addition to merger and foreign investment control requirements, aerospace, defense, national security and public order acquisitions may also fall under the FSR. Where a target business generates EU turnover of EUR 500 million or more and the parties received more than EUR 50 million financial contributions from third countries in the three years preceding the conclusion of the agreement, FSR approval may be required. This adds a further layer of scrutiny for transactions. The FSR operates alongside merger control and FDI screening, creating a “triple gatekeeper” dynamic for acquirers of European assets.

Link to IV. The Intersection — Innovation, Investment, Scale, and Resilience Arguments IV. The Intersection — Innovation, Investment, Scale, and Resilience Arguments

Across all three regulatory frameworks, defense deals are an area of focus. Such deals may benefit from innovation, scale, resilience, and efficiency arguments. The FCO’s MGCS decision, in particular, reflects a recognition that certain defense programs require levels of collaboration that no single firm can deliver alone. The CMA’s Vodafone/Three clearance demonstrates that investment commitments can serve as a credible remedy tool, with the CMA’s December 2025 Remedies Guidance expressly citing it as a potential model for other suitable transactions.[22]

However, reliance on “theory of benefit” arguments requires robust evidence. For example, the Commission’s willingness to engage with longer-term dynamic benefits means that sophisticated economic modeling of R&D pipelines, production synergies, and capability gaps will be needed in order to evidence the specific benefits a transaction will generate. Further, such arguments cut both ways. A transaction that strengthens European defense capabilities through consolidation may simultaneously trigger FDI concerns if it introduces or deepens foreign ownership of critical assets. Dealmakers must recognize this inherent tension and plan their regulatory strategies accordingly.

Indeed, continued changes to geopolitical realities mean that defense sector investors must recognize the increased likelihood of conditions being imposed as part of any national security or foreign investment approval in particular, even for investors from allied nations. Conditions such as Government-nominated directors, security officers, and divestiture rights may affect deal economics and integration planning. These should be modeled as part of the upfront assessment and deal rationale.

[1] Defence investment and NATO’s 5% commitment.

[2] EU defence spending: €418 billion in 2025, projected to €454 billion in 2026.

[3] The Draghi report: A competitiveness strategy for Europe, pp. 7 and 15.

[4] Communication: A competitiveness compass for the EU, p. 15.

[5] White Paper: European Defence – Readiness 2030, p. 3.

[6] European Commission, IP/26/918, 30 April 2026.

[7] European Commission, Draft Merger Guidelines, paras. 327-328.

[8] Economic Study on Dynamic Effects of Mergers – Volume 1, p. 1.

[9] European Commission, Draft Merger Guidelines, para. 13.

[10] Ibid., paras. 9 and 15.

[11] Draft Merger Guidelines, para. 15.

[12] Communication from the Commission – Defence Readiness Omnibus, p. 10.