On 17 November 2025, the European Commission conditionally approved, under the Foreign Subsidies Regulation (FSR), Abu Dhabi National Oil Company PJSC’s (ADNOC) acquisition of Covestro AG, following an in‑depth phase two investigation. In this article, we examine the essential details of the clearance, and consider how it builds upon the Commission’s previous clearance decision.

The transaction

ADNOC is a UAE state-owned oil and gas producer, based in Abu Dhabi. Covestro is a German chemicals producer with a particular focus on high-performance polymers. 

ADNOC agreed to acquire Covestro for nearly €15bn on 1 October 2024. As well as requiring approval under the FSR, the transaction was subject to EU Merger Regulation (EUMR) notification requirements, receiving phase one clearance on 12 May 2025.

The Commission’s investigation and findings 

The Commission referred the transaction to an in-depth phase two investigation, citing concerns that the acquisition process may have been distorted by foreign subsidies, and that such subsidies might also lead to negative effects on the EU’s internal market post-transaction.

Those concerns were validated by the Commission’s in-depth investigation. Although a public version of the clearance decision is not yet available (and, based on previous experience, will likely take some months to emerge), the Commission’s press release reveals that it found that:

• both ADNOC and Covestro received foreign subsidies from the UAE that are liable to distort the EU’s internal market, in particular: (i) an unlimited state guarantee to ADNOC; (ii) a committed capital increase by ADNOC into Covestro; and (iii) certain advantageous tax measures;
• the subsidies may have had negative effects on competition in the acquisition process, as the unduly favourable conditions offered by ADNOC (including the committed capital increase) may have deterred other investors from bidding for Covestro; and
• the subsidies would also likely have distorted competition in relation to the combined entity’s activities after closing, by artificially improving the merged entity’s capacity to finance its activities and increasing its indifference to risk. 

The remedies

To address the above-mentioned concerns, the merger parties agreed to the following commitments:

• ADNOC will adapt its articles of association to ensure alignment with ordinary UAE insolvency law.
• Covestro’s patents in the area of sustainability will be licensed to certain EU market participants on transparent, pre‑set terms and conditions. 

The Commission found that these commitments will: (i) remove ADNOC’s unlimited guarantee; and (ii) “balance out” negative effects on competition, by ensuring EU companies can access Covestro’s sustainability technologies, providing wider benefits for innovation in the chemicals sector. 

The commitments will apply for ten years; any patent licences entered into within that period will continue for their contractual lifetime. 

Analysis and comparison with e&/PPF decision

The ADNOC/Covestro decision is only the Commission’s second phase two FSR merger decision, following that in e&/PPF (on which see our previous article).

As noted above, the full clearance decision is not yet publicly available. When it is, the Commission’s reasoning on the existence of distortions and the adequacy of the commitments will become a lot clearer. Nevertheless, some initial observations on the decision can be made.

• Despite the FSR being widely viewed as having been conceived to tackle subsidies to Chinese companies operating in the EU, the only remedies imposed in merger cases to date have concerned inward investments from the UAE (a country not usually seen as a strategic competitor). This may indicate that Chinese-backed investments are either better structured and FSR-prepared, or that Chinese investors are simply not engaging in potentially difficult transactions in the first place.
• This is the first finding of a distortion in the acquisition process; in e&/PPF, no such distortion was found, given: the absence of rival bidders; the valuation was consistent with comparables; and e& was able to finance the deal absent the guarantee from which it benefitted.
• As regards distortions in the market post-transaction, the Commission appears to have focused on the same theory of harm as in e&/PPF, namely the possibility of the merged entity’s subsidy‑enhanced risk tolerance fuelling aggressive investment strategies, giving it an unfair advantage, to the detriment of its EU competitors.
• It appears in ADNOC/Covestro that the most egregious subsidy – the unlimited state guarantee from the UAE – had the same origin as that at the heart of the e&/PPF decision. In particular, the operation of the UAE’s bankruptcy laws has the effect of excluding state-owned firms from usual bankruptcy procedures, unless provision to the contrary is made in the firm’s articles of association.
• As was the case in e&/PPF, the ADNOC/Covestro commitments aim to remove that key foreign subsidy by requiring ADNOC to amend its articles of association so that it follows standard UAE insolvency law.
• The second limb of the commitments (the licensing obligation) is more curious. Under Article 7 FSR, commitments must “fully and effectively remedy the distortion in the internal market”. However, the licensing obligation is drafted so as expressly to exclude from its scope any of Covestro’s competitors. It therefore seems clear the commitment doesn’t address the post-transaction distortion summarised above. Under the so-called “balancing test” in Article 6 FSR, the Commission is able to take a subsidy’s wider positive effects into account when deciding whether to accept commitments and what form they should take, but the Commission’s press release does not expressly state that that test was applied in this case (albeit it did say that the licensing obligation “will balance out” the harm to competition). The commitments’ apparent disconnect from the harm to competition identified should hopefully become clearer upon publication of the decision.

Practical takeaways and evolving FSR doctrine

The two decisions reflect the Commission’s focus on unlimited state guarantees, and illustrate the need for robust economic evidence on the market‑conformity of a transaction’s valuation and/or financing. The FSR risk around unlimited state guarantees in particular has already been noticed by the investment community, with experienced investors proactively mitigating the concern upfront by amending statutes and corporate governance arrangements before engaging in FSR-reportable transactions.

On the other hand, they also show the Commission’s willingness to adopt flexible, tailored behavioural remedies rather than structural divestitures. And the innovation‑oriented licensing commitment in ADNOC/Covestro marks an openness towards balancing of distortions with industry‑wide benefits. This can be contrasted with processes under the EUMR, where the Commission remains highly sceptical of non-structural remedies, and where out-of-market benefits tend not to obtain any traction. Merging parties faced with foreign subsidies concerns should therefore be prepared to think creatively in designing an appropriate suite of commitments.