The Foreign Subsidies Regulation In Action Part Two: Learnings From The ADNOC/Covestro Decision

In February 2026, the European Commission published the non-confidential version of its decision to conditionally approve Abu Dhabi National Oil Company’s (ADNOC) acquisition of Covestro AG (Covestro), shedding further light on its approach to enforcing the merger component of the Foreign Subsidies Regulation (FSR).

On 1 October 2024, ADNOC agreed to acquire Covestro - a publicly listed German chemicals producer focused on the supply of high-performance polymers - for €62 per share. As discussed in our previous article, the Commission cleared the deal subject to commitments in November 2025, following its second in-depth merger investigation under the FSR. 

The published non-confidential decision, while heavily redacted in parts, provides a helpful insight into the Commission's approach to several key issues under the FSR, including: (i) the identification of foreign subsidies; (ii) the assessment of distortions; and (iii) the role of commitments in securing clearance. 

In this article, we highlight some of the key points and consider the practical takeaways from the Commission’s decision.

Identification of foreign subsidies

The Commission identified three main categories of foreign subsidies in its investigation: (i) the existence of a state guarantee in favour of ADNOC; (ii) a capital injection by ADNOC into Covestro; and (iii) certain advantageous tax measures benefitting ADNOC.

i. Unlimited state guarantee

As in the earlier case of e&/PPF  (discussed in our previous article), the Commission concluded that ADNOC benefitted from an “Unlimited Guarantee”. While much of the reasoning on this point was redacted, it is clear that the Commission concluded that, under the applicable legal framework, ADNOC’s status as a state-owned company excluded it from the ordinary application of UAE bankruptcy law.

Further, the Commission considered there to be strong indicators that the Government of Abu Dhabi would intervene to support ADNOC in the event of financial distress - even in the absence of an express legal obligation for it to do so. In particular, there were strong economic and administrative links between the two, with ADNOC playing a central role in the Abu Dhabi economy (accounting for 50% of GDP and 75% of government revenues). This view was also shared by market participants and, significantly, global credit ratings agencies - whose credit reports the Commission cited.

 ii. Capital injection into Covestro

As part of its offer, ADNOC committed to injecting €1.17bn of equity funding into Covestro post-acquisition (the Capital Injection). The Commission found that the Capital Injection “directly facilitated the transaction” because it enabled ADNOC to unlock transaction negotiations (in combination with its high offer price) and thereby “acquire a company that it would not otherwise have acquired”.

Moreover, the Commission concluded that the Capital Injection, even though made by ADNOC through its own funds, could be attributed to the UAE on the basis that ADNOC is 100% owned by the Abu Dhabi emirate and is subject to oversight by the UAE Supreme Council for Financial and Economic Affairs, membership of which overlapped to a significant extent with ADNOC’s board. 

iii. Tax measures

The Commission concluded that the following fiscal arrangements constituted foreign subsidies.

• Tax-free zones: certain ADNOC entities in Abu Dhabi are located in special UAE tax-free zones, generating qualifying income subject to a 0% tax rate (instead of the standard 9% tax rate).
• Tax holiday: one of ADNOC’s entities had made use of a tax holiday in 2024, pursuant to a fiscal letter from the UAE tax authorities (details of which were redacted).
• Global Trade Programme: ADNOC participated in the Singaporean Global Trade Programme (GTP), which provides concessionary tax rates on qualifying income to eligible companies operating in Singapore. 

Two points here are notable. First, the Commission considered it irrelevant that ADNOC’s overall tax rate in Abu Dhabi (after the benefit of the first two measures above was accounted for) was actually considerably higher than those of other companies, given its upstream oil and gas activities were subject to a 55% income tax. Second, the Commission took the view that tax schemes open to all qualifying companies (including in states not linked to the undertaking under investigation - in this case Singapore) were sufficiently “selective” to constitute subsidies.

Assessment of distortions 

The Commission concluded that the Unlimited Guarantee and Capital Injection fell within Article 5(1) FSR (as subsidies “most likely to distort the internal market”) and that the parties had, in this case, failed to adduce sufficient evidence and analysis to overturn the presumption of distortion that follows from such a characterisation.

While not strictly necessary, the Commission nevertheless went on to carry out a detailed assessment of whether a distortion was likely. Under the FSR, a distortion is deemed to occur where a foreign subsidy: (i) is liable to improve a company’s competitive position in the internal market; and (ii) actually or potentially negatively affects competition. The Commission identified two such likely distortions: (i) in the acquisition process; and (ii) post-transaction.

i. Distortion in the acquisition process

The Commission concluded that the subsidies identified above were capable of improving ADNOC’s ability to pursue and secure the acquisition of Covestro, on conditions that would not have been available to a non-subsidised investor.

Of particular note, the Commission noted that ADNOC’s offer price (€62 per share) was more than a non-subsidised acquirer would have offered. The Commission appears to have engaged in an extensive analysis of market benchmarks, valuation methodologies and analysts’ reports to support this conclusion. The promised Capital Injection was also decisive in persuading Covestro’s management to recommend ADNOC’s offer to shareholders.

Further, the Commission considered that ADNOC’s status as a state-owned enterprise may have had a “chilling effect on other potential acquirers”. Accordingly, the behaviour induced by the foreign subsidies was capable of altering or interfering with the competitive dynamics of the acquisition process - even though there had been no competitive sale process, and no other potential acquirers were identified. 

At the same time, the Commission admitted that the distortion here was limited, and that it was principally concerned about potential distortions post-transaction. 

ii. Distortion post-transaction

The Commission found that the foreign subsidies identified above were capable of improving the merging parties’ competitive position in the internal market, and likely to benefit Covestro’s activities materially. Here, the Commission emphasised that the Unlimited Guarantee’s benefit was “not limited to a quantifiable amount or duration” and that the value of the Capital Injection was significant. 

As to the second part of the distortion test, the Commission focused on investments Covestro intended to carry out post-transaction using ADNOC’s funds, concluding that the transaction would lead to a "significant change to Covestro's investment trajectory”. Numerous internal Covestro documents supported this, providing “cogent evidence” of the importance of funding commitments from ADNOC (beyond just the Capital Injection) to Covestro’s future projects, and that this formed a core part of the deal rationale. 

Finally, the Commission concluded that the behaviour induced by the foreign subsidies was capable of altering competitive dynamics in the EU chemicals sector, to the detriment of other firms. To support this, the Commission pointed to: (i) Covestro’s key position in the chemicals industry, as one of the top three players with strong R&D capabilities; (ii) the fundamental importance of investment in the sector; and (iii) ADNOC’s funds being explicitly aimed at bolstering investments, enabling Covestro to pursue growth throughout the economic cycle. The Commission considered this conclusion was not diminished by the healthy funding and strong R&D capabilities of Covestro’s competitors, who in any event were “not the subject of this investigation”.

The role of commitments in securing clearance 

To address the distortions identified by the Commission, the parties agreed to the following commitments.

• Amending ADNOC’s Articles of Association to state that ADNOC is subject to ordinary corporate insolvency legislation in the UAE, combined with not taking any steps that conflict with or disapply this.
• Honouring all market-standard licensing requests for Covestro’s existing and future sustainability patents, for use in EU production – provided the relevant licensees are not one of eight named competitors. Covestro will also continue to honour existing competitor R&D co-operations. These commitments (the IP Commitments) are to be overseen by a monitoring trustee, and subject to a dispute resolution procedure.

The commitments are valid for a period of 10 years, with certain of the IP Commitments continuing thereafter, for the lifetime of any licensing agreement entered into in that period.

As part of its assessment of the initial set of commitments offered, the Commission required certain improvements to the IP Commitments, including shortening the list of excluded competitors (from 17) and widening the geographic scope of the licences agreed thereunder (to allow licensees to export worldwide). But its final analysis of the effectiveness of the commitments was relatively light and, in some places, speculative, concluding that:

• amending ADNOC’s articles would address the Unlimited Guarantee going forward. However, no consideration appears to have been given to whether ADNOC and its subsidiaries (including Covestro) would nevertheless continue to benefit from an expectation that the Abu Dhabi Government would support ADNOC in the event of financial distress; and
   
• the IP Commitments would address the identified distortions, by: enabling Covestro’s competitors to benefit from and build upon its IP; benefitting firms in neighbouring and downstream markets (and potentially the whole EU chemical sustainability ecosystem); and by making Covestro’s technology available to future M&A targets (thereby addressing the distortion in the acquisition process).

Interestingly, while the Commission’s original press release noted that the final commitments would "balance out" the distortions, the decision itself contains no such language, stating that the revised IP Commitments in particular would “fully and effectively remove the distortions from the identified foreign subsidies”. This is despite the fact that the Commission took into account “spill-over effects going beyond the chemicals industry”, in sectors that would presumably be unaffected by the distortions. Further, the decision does not appear to address the possibility of there being segments in which adversely impacted competitors will not be able to benefit from the IP Commitments (i.e. because the in-scope sustainability patents are not relevant to their activities).

Overall, one might interpret the commitments in this case as a quid-pro-quo, rather than being designed to surgically address the root causes of the distortions identified.

Practical takeaways

There are numerous learnings from the decision that merging parties should keep in mind when approaching a transaction that is likely to fall within the FSR’s scope, including the following:

• Acquirer risk: third state-owned/backed companies face significant risks when investing in the EU. Even where investments are self-funded (as was the case here), the Commission is prepared to be creative in identifying potentially distortive foreign subsidies.
   
• Acquisition price: merging parties should be aware that a purchase price that is at a premium to the prevailing share price and/or comparator valuations risks being viewed as evidence of a distorted acquisition process, heightening FSR risk (even in the absence of a competitive bidding process).
   
• Notification and investigation process: pre-notification in this case took seven and a half months, with the FSR notification being submitted two days after the deal received competition clearance under the EU Merger Regulation (EUMR). It is also apparent from the decision that significant delays were caused by negotiations between the parties and the Commission regarding detailed (and unfulfilled) information requests, with the formal clock being stopped twice. Parties to deals with similar risk profiles should allow for such delays in their timelines, and include appropriate long-stop dates in transaction documents.
   
• Remedies: as in e&/PPF, it appears there is scope for merging parties to propose creative commitments to address the Commission’s substantive concerns - more so than in EUMR cases. Further, this case suggests that the Commission is willing to be flexible in respect of how directly targeted at the identified distortions the parties’ commitments need to be. In particular, by offering IP Commitments that offered broad benefits to EU manufacturing, it seems the parties in this case were able to avoid having to financially ring-fence Covestro from the rest of the ADNOC group (as e& agreed to in its commitments regarding PPF), which would have undermined a significant element of the transaction’s rationale.

Macfarlanes is a pre-eminent law firm advising a global client base across Private Capital, Private Wealth, M&A and Disputes.

Visit our website to learn more about our services and how we can assist.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.