Defence Sector

The defence and security industry involves navigating a complex landscape marked by geopolitical shifts, regulatory challenges, and ethical considerations. The sector has gained increased attention due to recent geopolitical tensions and initiatives within the European Union and its Member States, including Finland. As a result, many investors have shifted their ESG perspectives regarding these investments.

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M&A in the defence sector

Opportunities presented by the defence sector include access to a global market, high regulatory barriers to entry, and long-term contracts providing revenue stability. Risks involve political and regulatory changes and dependence on large contracts.

Mergers and acquisitions in the defence sector are characterised by special features such as:

Due diligence: The due diligence process is complicated by the presence of classified information, potentially requiring security clearances.
Governmental contracts: Change of control clauses in government contracts may require consents or notifications. Procurement laws may restrict contract modifications, impacting upselling opportunities.
Supply chain and compliance: Local content requirements and export control regulations necessitate careful assessment of supply chains and compliance setups.
Regulatory approvals: Investments by foreign entities often require a foreign direct investment approval.

Emerging technologies

With the increasingly complex global geopolitical situation, new technological solutions have emerged with potential military applications. Such emerging technologies include quantum-based technologies, artificial intelligence (AI), robotics and autonomous weapons systems, big data analytics, hypersonic weapons systems, space technologies, and new advanced materials.

Emerging technologies raise legal questions related to early-stage funding, data privacy and security, intellectual property rights as well as liability and accountability.

Defence contracting

Defence contracting differs from other public procurement in several ways due to the unique nature of military needs and the sensitive nature of the goods and services involved. The Ministry of Defence in Finland, alongside the Finnish Committee on Industrial Participation, oversees industrial participation agreements and ensures adherence to relevant regulations.

The procurement process in the defence sector focuses on competitive tendering, cost-effectiveness, and equal treatment of bidders, while prioritising national security interests. Finland aims to sustain domestic industrial and technological expertise to independently use and maintain critical defence systems. Industrial cooperation is vital for ensuring military supply security and access to essential technologies, either directly related to the procured system or indirectly by transferring technology and expertise to the domestic industry.

Export controls and sanctions

The defence and aerospace sector is heavily regulated by arms export controls, and it also faces significant impacts from dual-use export controls, particularly in sub-sectors like the space industry. Companies operating in these areas often deal more with dual-use regulations than traditional arms controls. In addition to regulatory requirements directly applicable in Finland based on national and EU level dual-use and defence materiel legislation, U.S. re-export controls add complexity to the compliance framework.

Companies in the defence sector are encouraged by the regulators, and at times required, to have an internal compliance program ensuring compliance with relevant export controls and sanctions regulations. An internal compliance program should cover at least the following:

Screening of restricted parties and end-use verification: Screening of sanctions lists and confirmation that products will not be used for any prohibited end-uses.
Classification: Classification of items and technology under the relevant export control regulations.
Licensing and permit requirements: Adherence with applicable licensing requirements and related data retention.
Oversight of supply chain: Ensuring compliance with regulations throughout the supply chain.

The defence sector encounters challenges due to the complex and sensitive nature of its exports, as well as varying interpretations and classifications by suppliers and even regulators. Export control regulation is often open to differing interpretations, underscoring the importance of pragmatic advice at key stages as well as good and proactive relationships with regulators and licensing authorities.

Foreign direct investment screening

Investments by foreign investors in the Finnish defence and security industry require FDI approval when the foreign investor directly or indirectly obtains possession or control of at least 10% of the shares or voting rights, or similar control by other means, of a target domiciled in Finland. Approval is also required for investments in certain other sectors such as critical infrastructure and technologies or dual-use items. Finland is in the process of amending the Finnish FDI legislation which is expected to introduce several changes, such as the inclusion of greenfield investments within the scope of the filing obligation.

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