NATO significantly increases defence spending – Legal challenges for a security and defence industry 5.0

Neither the manufacturers' production facilities nor the suppliers along the supply chain are seriously prepared for the situation. Enormous upheavals are imminent, as evidenced, for example, by the growth of companies such as Helsing, which has developed from a start-up to a major market player and has recently invested hundreds of millions of pounds in production facilities in the United Kingdom alone. 

This example shows that building new production facilities can bind a significant amount of capital. Anyone who wants to increase their production capacity must deal with the financing of the expansion and new construction of their production facilities. Consequently, manufacturing companies also have a considerable interest in securing their investments economically, for example by concluding long-term supply contracts.

The framework conditions within the security and defence industry are more heavily regulated by law than in many other sectors. Changes in legal requirements can therefore have a significant impact on the business model of manufacturing companies and their suppliers. For example, the deployment of employees in certain areas may require these employees to undergo a security check in accordance with the German Security Check Act (German: Sicherheitsüberprüfungsgesetz, SÜG). This can make it difficult to deploy employees flexibly. In the case of new hires, a lengthy security check procedure can mean that companies only find out whether they are allowed to deploy their new employees in a position that requires security clearance after the employee’s probationary period has expired. In addition, there are a number of licence requirements for the production, transport and export of defence goods. A double licence requirement applies to exports, as licences are required under both the War Weapons Control Act (German: Kriegswaffenkontrollgesetz) and the Foreign Trade Act (German: Außenwirtschaftsgesetz).

It is therefore essential to be aware of legislative activity in this area and to make the necessary adjustments to contracts and procedures. In fact, there are signs that the regulatory framework for the security and defence industry could undergo fundamental changes in the near future. Well-known associations such as the Federal Association of the German Security and Defence Industry are calling for adjustments to the legal situation in order to simplify and accelerate the expansion and reconstruction of production facilities. In June 2025, the Federal Government presented a draft bill with the same objective.

Recently, in June 2025, the Federal Association of the German Security and Defence Industry (German: Bundesverband der Deutschen Sicherheits- und Verteidigungsindustrie) proposed a comprehensive package of legislative measures. These measures primarily concern public procurement law. The association proposes expanding the circle of potential bidders in procurement procedures. At present, participating in procurement procedures is particularly difficult for start-ups. The association proposes that the legislator should counteract this by lowering or abolishing the turnover and liquidity requirements of procurement law for security and defence-related projects. Outside of procurement, approval procedures for the export of defence goods in particular should be simplified. Specifically, the association proposes introducing a single complementary permit for exports instead of the double licence requirement. In addition, the legislator should create the possibility of obtaining approval for the export of defence goods at the same time as approval for manufacture. Furthermore, security checks should be accelerated and the information obligations of the authorities involved should be laid down in law for the benefit of companies.

The association also calls for the increased use of so-called standby contracts (German: Vorhalteverträge). These are a special type of contract in which the supplier's performance does not consist solely of the delivery of the ordered goods. Instead, the purchaser pays the supplier in advance to keep the goods to be delivered on call. This allows the public sector to maintain the security of supply for the armed forces in a flexible manner without this being at the expense of the contracted company.

It remains to be seen whether and to what extent these demands will be implemented. With regard to the procurement procedure, the Federal Government presented a draft bill for a new Bundeswehr Planning and Procurement Acceleration Act (German: Bundeswehrplanungs- und beschaffungsbeschleunigungsgesetz (BwPBBG)) on 1 October 2025, which is intended to simplify and accelerate the award of defence-related contracts (available here: DIP - Act on Accelerated Planning and Procurement for the Bundeswehr). For example, the scope of application for accelerated direct awards is to be expanded on the basis of essential security interests. In addition, the draft provides for the possibility of advance payments by the public sector in order to facilitate investment and expand the pool of potential bidders. Start-ups and companies with lower liquidity are expected to benefit from this.

The European Investment Bank (EIB) has also already responded by significantly increasing the financing framework for investments in ‘Europe's strategic and technological independence’ for 2026 to €100 billion. Of this, €4.5 billion is earmarked for investments in security and defence (EIB Group renews record-high financing target of €100 billion to boost Europe’s strategic and technological independence). It has also expanded the catalogue of eligible projects in the security and defence industry. Ultimately, this is also an important signal for small and medium-sized enterprises, whose lenders often refinance with the EIB. Overall, the EIB has made it much easier for companies in the security and defence industry to access finance. The eligible projects cover a wide range of areas. They now also include military-related infrastructure projects, research and development projects, for example in drone technology, projects in cyber security and even in space travel. In addition to the procurement of military helicopters by Italy, the EIB has therefore also co-financed, for example, the development of satellites in Poland and Spain, cyber security programms in France and investments in military infrastructure in the Baltic States. 

Due to these and other EU-wide facilitations in the financing of security and defence projects, it is strongly recommended that participating companies review their financing options. 

Furthermore, the increase in European security and defence spending comes at a time of unprecedented structural change in the automotive industry. Due to the increasing market share of electric vehicles and intense international competition, several European car manufacturers are considering significantly reducing their production capacities by closing production sites. The transformation of the security and defence industry may therefore represent an opportunity for affected companies in individual cases to use existing production resources for the manufacture of other goods and products in the future. Some car manufacturers are already involved in the security and defence industry, often through subsidiaries and joint ventures. However, due to the current market situation, some suppliers and service providers to the automotive industry are also attempting to diversify their offerings more and acquire new orders in the security and defence industry. 

However, such a transformation of the use of production facilities towards the production of security and defence goods is associated with considerable practical and legal challenges. From an organisational point of view, it is generally advisable to spin off the production and distribution of goods for the security and defence industry into a separate business unit, which raises corporate law issues such as the choice of the appropriate legal form for the business unit. Legal and technical measures may also be necessary with regard to production. For technical reasons, existing production facilities are often only suitable for the production of security and defence goods after extensive conversion. One particular legal challenge lies in the implementation of regulatory requirements for the security and defence industry, for example in the execution of the necessary approval procedures or the requirements of the Security Screening Act already outlined for certain employees. In addition, it can be assumed that companies will have to completely restructure their supply chains. One such special feature, for example, are quality management plans, which some public clients require and which contractors therefore often contractually oblige their suppliers to conduct as well. These issues require comprehensive contract management to terminate old supply contracts and conclude new ones.