The new Defence Industrial Strategy (the “DIS”) marks a significant shift in how the federal government intends to procure, fund and safeguard Canada’s defence capabilities. The strategy is ambitious. It includes allocating 70% of defence acquisitions to Canadian firms, increasing defence exports by 50%, and creating up to 125,000 jobs by 2035.1 This is expected to create significant opportunities for small- and medium-sized businesses (“SMBs”), investors and merger and acquisition (“M&A”) firms.
Companies looking to position themselves in this sector should familiarize themselves with the new procurement rules, Canadian content requirements, intellectual property issues, and potential increased regulatory scrutiny.
What does the new defence procurement framework entail?
The strategy is based, in part, on the “Build-Partner-Buy” framework. The government intends to prioritize domestic production in Canada for capabilities essential to preserving sovereignty. It will collaborate with allies where domestic capacity is insufficient and purchase abroad only when the first two options are not feasible.
This approach could benefit Canadian companies active in sectors such as aerospace, artificial intelligence (“AI”), cybersecurity, space technologies, sensors, uncrewed and autonomous systems, in-service support, training and simulation, medical countermeasures, shipbuilding, and land systems.
However, companies will need to ensure that their structure, supply chains, and bids comply with applicable requirements, particularly those regarding Canadian content and industrial and technological benefits.
What business opportunities exist for Canadian SMBs?
SMBs account for 92% of Canada’s defence industrial base2 and play a central role in the strategy. The government plans to introduce new financing and support mechanisms, including:
- creating a Defence Investment Agency (DIA);
- launching a $4 billion Defence Platform at the Business Development Bank of Canada (BDC);
- implementing a $357.7-million Regional Defence Investment Initiative; and
- establishing a new Defence Industry Assist stream through the Industrial Research Assistance Program (IRAP) at the National Research Council (NRC).
These measures aim to help SMBs access capital, develop dual-use technologies, integrate into major contractors’ supply chains, and increase exports.
That said, SMBs will need to prepare for a more demanding environment. Security clearances, the Controlled Goods Program, export controls, cybersecurity, data protection, and defence-specific contractual requirements will be essential for staying competitive.
What impact will this have on M&A in Canada?
The strategy is also expected to stimulate transaction activity in the defence and dual-use technology sectors.
Canadian companies with sovereign capabilities, strategic intellectual property, or expertise in priority sectors may become appealing to strategic buyers, institutional investors, private equity funds, and foreign entrepreneurs looking to expand their presence in Canada.
M&A transactions may include:
- the acquisition of Canadian SMBs;
- the creation of joint ventures;
- minority investments; and
- strategic partnerships,
allowing buyers to access local technologies and capabilities, meet Canadian requirements, grow their presence in Canada, and secure a position in future supply chains.
However, investors should be aware of the possibility of increased regulatory scrutiny, particularly under the Investment Canada Act, when a transaction involves non-Canadians. Transactions involving sensitive technologies, critical minerals, strategic infrastructure, sensitive data, or defence supply chains may be subject to further national security scrutiny.
What does the strategy say about intellectual property and Canadian control?
The strategy emphasizes domestic protection and control of intellectual property. This aspect is particularly important for companies involved in innovation, dual-use technologies, AI, quantum computing, cybersecurity, autonomous systems, and space technologies.
Companies should review their shareholder, intellectual property, licensing, co-development, and technology transfer agreements. In a transactional context, stakeholders must confirm the applicable rights and restrictions, as well as the conditions surrounding the use, transfer, or export of technology.
How can companies better prepare for upcoming opportunities in the defence sector?
To capitalize on the opportunities created by the strategy, companies must strengthen their legal and regulatory preparedness. Legal considerations include access to public defence procurement markets, Canadian content and industrial benefits requirements, security obligations, export controls and controlled goods, cybersecurity, foreign investment, intellectual property, and obligations related to northern projects and Indigenous partners.
The DIS could transform the Canadian defence market over the next decade. For SMBs, it opens the door to new contracts, financing, and partnerships. For the M&A market, it could increase the strategic value of Canadian companies that are active in defence and dual-use technologies.
Companies that properly structure their ownership, intellectual property, regulatory compliance, and partnerships early on will be best positioned to capitalize on this new framework.
Miller Thomson is here to help.
Our lawyers have in-depth expertise in transactions involving the defence, aerospace, and dual-use technology sectors. We help SMBs and investors navigate the rapidly changing regulatory environment, from due diligence to closing the transaction. Contact our Mergers & Acquisitions lawyers to discuss what the DIS could mean for your business.
- Canada’s Defence Industrial Strategy (“Achieving Results for Canada” section). ↩︎
- Canada’s Defence Industrial Strategy (“An Important Contributor to Jobs and Growth” section). ↩︎
