Exemptions within the Aerospace and Defense Industry (Initial Installment)

The process of carve-outs in the aerospace and defence sector is fraught with complex regulatory requirements, particularly in the areas of export controls, security clearances, and foreign direct investment (FDI) screening. These hurdles are crucial for ensuring national security, protecting sensitive technologies, and maintaining compliance with international agreements and laws.

**Export Controls: A Labyrinth of Regulations**

The transfer of technology, sensitive data, or controlled goods during a carve-out often necessitates explicit authorization from relevant export control authorities. This includes licensing, data transfer restrictions, EEI filings, and compliance with international and national laws. Companies must be vigilant about end-use and end-user controls to avoid violations, especially when dealing with military or dual-use items under the U.S. International Traffic in Arms Regulations (ITAR).

**Security Clearances: Safeguarding Sensitive Information**

Many defence projects require stringent secrecy. Personnel, including new shareholders, directors, or board members, often need to undergo security clearance checks before being granted access to classified information. Carve-out processes must not compromise ongoing confidentiality obligations. This can necessitate implementing special trust structures, such as "black box" solutions or FOCI (Foreign Ownership, Control, or Influence) mitigation strategies, to prevent unauthorised access to top-secret projects.

**Investment Controls: Ensuring National Security**

Transactions involving foreign investors may trigger national security reviews, especially if the investment could lead to access to sensitive technologies or classified information. Foreign investors may be excluded from certain projects or required to meet additional conditions to mitigate perceived risks. Companies must also comply with outbound investment regulations, such as U.S. executive orders on outbound investment, which require scrutiny of investments abroad that could transfer critical technologies or expertise to potential adversaries.

A summary table outlines the key hurdles in each regulatory area:

| Regulatory Area | Key Hurdles | |----------------------|----------------------------------------------------------------------------------------------| | Export Controls | Licensing, data transfer restrictions, EEI filings, ITAR compliance, end-use/end-user checks | | Security Clearances | Personnel vetting, confidentiality protection, notification to authorities, trust structures | | Investment Controls | Foreign investment review, outbound investment regulation, FOCI mitigation |

Companies in the defence sector often prefer European (or NATO) investors as buyers to allay concerns about investment screening. Carve-outs in the A&D sector are driven by factors such as technological upheavals, market changes, and the need for reorientation. Financial benefits, including generating capital for investments or debt reduction, and increasing the value of the company, are also significant motivators.

In carve-out projects involving defence companies, extensive transfer of technology and data requires careful handling to avoid export control offences. Export control requirements apply to weapons, defence equipment, and many aerospace products, necessitating a close examination of all export licences and requirements in carve-out transactions.

Investment screening for foreign investments in the defence sector is a critical factor, with Germany requiring approval for investors from outside the EU/EFTA acquiring more than 10% of the shares in a German defence company. Conditions such as long-term site security, restrictions on access to information for certain shareholders, or the composition of management can be possible requirements in the signing/closing process.

The development of defence budgets plays a role in carve-outs, with some businesses being spun off during periods of falling budgets and others during high demand for armaments. The A&D sector is subject to strict regulations, with these three key areas to consider: export control law, secrecy/security clearances, and foreign direct investment (FDI) screening.

Many defence projects require secrecy, with companies and employees needing security clearances in accordance with the German Security Clearance Act (SÜG) or comparable regulations in other countries. A defence group could decide to spin off civilian business areas, or vice versa, to operate in both areas more focusedly.

Established aerospace and defence companies consider carve-outs due to strategic reasons, such as sharpening focus on core business and separating non-core business areas. The review process can take several months, especially if an in-depth review is initiated. In a carve-out, the divested entity must ensure it has all necessary export licences to export its products, regardless of whether it receives a new owner as part of the transaction.

Carve-outs in the aerospace and defence sector are increasingly important for optimizing portfolios and focusing on core areas. Structuring measures, such as participation of a state or domestic partner as a minority, may be taken to allay concerns about investment screening. Confidential technical documents must be shown to potential buyers during the due diligence process, necessitating close examination of export licences and potential authorizations.

In an asset deal, there is a risk that export licences will have to be reapplied for, as these are not usually automatically transferred to the acquirer. In a share deal, existing licences initially remain with the company, but a change in the ownership structure may require notification or approval. Changes in the ownership or control structure of a defence company must often be reported to the relevant security authorities.

The transfer of sensitive data or controlled goods during a carve-out in the aerospace and defence sector may require explicit authorization from relevant export control authorities, including licensing, data transfer restrictions, EEI filings, and compliance with international and national laws.
Many defence projects require stringent secrecy, and personnel, including new shareholders, directors, or board members, may need to undergo security clearance checks before being granted access to classified information.
Transactions involving foreign investors in the defence sector may trigger national security reviews, especially if the investment could lead to access to sensitive technologies or classified information. Companies must also comply with outbound investment regulations.
In the aerospace and defence industry, the development of budgets plays a role in carve-outs, with businesses being spun off during periods of falling budgets and others during high demand for armaments.
During the carve-out process in the aerospace and defence sector, established companies may consider strategic measures such as participation of a state or domestic partner as a minority to allay concerns about investment screening, and confidential technical documents must be shown to potential buyers during the due diligence process.