In mid-February, the federal government launched Canada's first Defence Industrial Strategy, aiming to transform the Canadian defence industry by prioritizing Canadian suppliers and materials, investing in Canadian innovation and commercialization, and streamlining procurement. The Strategy represents an investment of over half a trillion dollars during the next 10 years, creating significant capital opportunities for Canadian businesses. With these commitments, the government intends to position the Canadian industry to take advantage of C$180 billion in defence procurement opportunities and C$290 billion in defence-related capital investment opportunities over the coming decade.
As discussed in our recent article "Policy, Dual-Use and DefTech Drive a New Era for Private Capital in Defence," the Strategy signals a shift in how Canada approaches national security and industrial capacity. The implications will extend well beyond traditional defence contractors, touching M&A activity, private equity strategy, foreign investment and technology commercialization. Below, we outline the key opportunities the Strategy creates, and the legal and regulatory considerations businesses should keep in mind.
Consolidation in the Canadian Defence Sector
Canada's defence sector is composed largely of small and medium-sized enterprises. While these companies often possess deep technical expertise, many lack the scale necessary to compete for large-scale government contracts or to meet the ambitious production and supply chain requirements contemplated by the Strategy. As government spending increases and procurement expectations grow, we anticipate a significant wave of consolidation among Canadian defence contractors as businesses seek to achieve the size and operational capacity needed to participate meaningfully in this new landscape.
This consolidation activity will present attractive opportunities for strategic acquirers and well-positioned market participants. However, transactions in this sector carry unique legal complexities. Mergers and acquisitions among defence contractors will require careful analysis under the Competition Act, particularly where consolidation reduces the number of suppliers in already concentrated markets. Acquiring companies will need to understand the full scope of obligations undertaken by the target company, including pursuant to Canada's revamped Industrial and Technological Benefits policy. Additionally, access to controlled technology pre-closing as well as the transfer of controlled technology between entities and retention and integration of security-cleared personnel post-closing can introduce challenges that are not typically encountered in commercial transactions.
Growth in Dual-Use Technology Acquisitions
The Strategy's emphasis on Canadian innovation and commercialization is expected to drive increased acquisition activity involving dual-use technologies (technologies originally developed for civilian or commercial applications that can be adapted or used for defence or national security applications). Companies working in artificial intelligence, cybersecurity, autonomous systems, quantum computing, aerospace, advanced sensors, life sciences, robotics and other fields may find themselves newly positioned as strategic defence assets, even if they have historically operated entirely in the commercial space.
For founders and operators of these businesses, this shift creates both opportunity and complexity. Valuations may benefit from the strategic premium that defence relevance commands, but transactions involving dual-use technologies will likely attract heightened regulatory attention. Sellers should understand the implications of their technology being classified as dual-use, while buyers must be prepared to address defence and national security considerations as part of their acquisition strategy. In either case, all parties should prioritize understanding the applicable regulatory framework and developing the ability to engage proactively with government stakeholders.
Increased Private Equity Interest
Continuing the trends we have been discussing in our recent articles, "Private Equity and Venture Capital Investors Showing Renewed Interest in the Defence Industry" and "A New Era for Private Capital in Defence," the Strategy's long-term government spending commitments make the Canadian defence sector particularly attractive to private equity investors. Defence markets are characterized by high barriers to entry, a limited number of competing businesses and predictable revenue streams underpinned by government contracts. These are qualities that align well with private equity investment strategies. The current fragmentation of the Canadian defence market further enhances this appeal, as the sector is well suited to roll-up strategies in which a platform acquisition is followed by a series of add-on transactions to build scale.
Private equity firms evaluating opportunities in this space should be mindful of the regulatory environment that accompanies defence-sector investments. Government contracts often contain assignment and change-of-control provisions that must be carefully reviewed and addressed in transaction planning. Security clearance requirements, controlled goods obligations and ongoing compliance commitments can also affect deal structure and timeline. Businesses that invest early in understanding these dynamics will be best positioned to move quickly as opportunities emerge.
Foreign Investment and the Investment Canada Act
The Strategy's emphasis on Canadian sovereignty and the prioritization of Canadian suppliers will likely influence how the federal government assesses foreign acquisitions in the defence and related sectors. Under the Investment Canada Act (ICA), the government has the authority to review foreign investments that may be injurious to Canada's national security, and to review and approve significant investments by non-Canadians into Canadian businesses. Canada's Sensitive Technology List identifies those specific technologies with national security implications that are likely to draw increased scrutiny in national security assessments under the ICA. In the current environment, foreign acquirers should therefore expect enhanced scrutiny of transactions involving defence contractors, dual-use and sensitive technology companies, and businesses that form part of Canada's defence supply chain.
This heightened scrutiny introduces a non-negligeable degree of transaction uncertainty for foreign buyers. National security reviews can extend deal timelines, impose conditions on closing or even result in transactions being blocked entirely. Foreign investors must account for ICA risk from the earliest stages of transaction planning, building regulatory analysis and government engagement into their deal strategy rather than treating it as a late-stage consideration. At the same time, Canadian sellers considering offers from foreign buyers should understand how the current regulatory climate may affect the competitiveness and certainty of those bids relative to domestic alternatives.
How Bennett Jones Can Help
Bennett Jones has the experience to help businesses navigate the opportunities and complexities created by the Defence Industrial Strategy.
For buyers and investors, our team can help you determine ICA risk early in the transaction process, conduct enhanced regulatory due diligence, understand government contract assignment provisions and develop transaction structures that address national security and competition considerations from the outset. For sellers, we can help you prepare for the enhanced regulatory compliance that defence-sector transactions now demand, anticipate regulatory approval timelines and consider alternative capital sources where foreign investment review risk may affect deal outcomes.
If you would like to discuss how the Defence Industrial Strategy may affect your business or an upcoming transaction, we invite you to contact our team.
*The authors thank articling student Alexia Armstrong for her assistance with this post.
