How does German Secret Protection Law affect international M&A transactions targeting companies involved in defence activities

Given the latest political and economic developments, the defence industry in Germany has become highly dynamic. Production demand is rising, public spending in the defence sector is becoming more reliable and private investors are discovering new opportunities in financing defence projects. Additionally, defence companies are expanding and investing, which is also driving an increase in M&A activity within the sector.

Investing in defence, i.e. acquiring a defence company entails specific legal and regulatory requirements that may present surprises, particularly for investors unfamiliar with the sector. These requirements often need adjustments to standardised M&A procedures.

From the outset of an M&A project, a key concern is that the target defence company typically handles classified information (e.g. during production). Therefore, the transaction must comply with German Secrecy Protection Rules. Disclosure of such information is either prohibited or strictly regulated, making standard due diligence procedures more complex.

Depending on the classification level (“confidential”, “secret” or higher), different procedures must be followed before information can be disclosed in a Data Toom. These include “personal requirements” (e.g. training, confidentiality undertakings or authorisation by public authorities) for individuals reviewing the information, as well as “material requirements” (e.g. IT and facility security standards). If the investor is a foreign entity, the transfer of classified information abroad becomes a critical issue.

These transaction challenges require specialised legal expertise and practical experience to guide clients effectively. Security Protection in Germany is governed by well-defined principles embedded in regulations such as the Classified Information Directive, the Security Clearance Act and the Security Protection Manual for private entities. These ensure that classified information is handled only by authorised individuals, in secure environments and under controlled conditions. Permissions are granted by designated departments within public authorities. Legal advisers must understand these regulations thoroughly, and ideally be familiar with the approval procedures and even the personnel involved, to ensure a smooth and timely transaction process.