European Commission approves ADNOC-Covestro merger under FSR rules

The rationale behind the opening of an in-depth investigation

The Commission identified certain foreign subsidies which could potentially distort the EU internal market, including:

• an unlimited State guarantee from the UAE, which results in ADNOC’s exemption from insolvency proceedings under UAE Bankruptcy Law, granted in the three years prior to the bid,
• a capital increase into Covestro, concluded as part of the acquisition process, and
• certain advantageous tax measures.

The Commission considered that such subsidies were likely to distort the internal market:

• Competition in the acquisition process: the conditions offered by ADNOC for the acquisition of Covestro, including the capital increase, may have deterred other investors from making an offer.
• Competition in the EU internal market: under the FSR, unlimited State guarantees are considered “most likely” to distort the internal market. The Commission found that, post-Transaction, the combined entity could have engaged in more aggressive investment strategies than absent the subsidies, to the detriment of other market participants and competitive conditions in the internal market.

Overall, the identified foreign subsidies would have artificially improved the capacity of the combined entity to finance its activities in the EU internal market and increased its indifference to risk. 

The conditional approval of the Commission 

According to the press release, the Commission cleared the Transaction subject to a set of commitments proposed by ADNOC. These commitments focus on neutralising distortive effects while generating sector-wide benefits, particularly through access to sustainable innovation.

These commitments, which apply for ten years (with certain IP-related obligations extending beyond this period), are as follows:

• Removal of the unlimited sovereign guarantee: ADNOC will remove any effect of the unlimited State guarantee by ensuring full applicability of UAE insolvency legislation and refraining from any action contradicting that legislation throughout the commitment period.
• Sector-wide access to Covestro’s sustainability-related intellectual property: Covestro will continue its existing R&D collaborations with competitors and will make its current and future sustainability-related patents available for licensing to EU companies (excluding specified competitors) on market terms. Covestro must also publish these patents, a list of eligible licensees, and a template licensing agreement on a dedicated website, enabling transparent access to these technologies.
• Monitoring: An independent Monitoring Trustee will oversee compliance, including supervising the IP-licensing framework, engaging with prospective licensees, and supporting dispute-resolution mechanisms, such as fast-track procedures and WIPO arbitration, thereby ensuring effective enforcement of these commitments.

A comparison with the earlier e&/PPF case helps illustrate how the Commission is shaping its early FSR enforcement practice. As noted, ADNOC/Covestro is only the second concentration cleared under the FSR after a Phase II investigation. 

Many elements resemble the precedent in e&/PPF: in that case too, e& benefited from an unlimited UAE State guarantee, and the Commission subjected clearance to the removal of that guarantee.

However, several elements differentiate ADNOC/Covestro:

• Capital increase: the Commission found that the capital increase into Covestro, to be completed post-Transaction, amounted to a foreign subsidy. In turn, the e&/PPF Telecom Group transaction did not include a capital increase. 
• Approach to clearance: The Commission’s approach in ADNOC/Covestro is comparatively more flexible. In e&/PPF, clearance was subject to ring-fencing obligations and restrictions on the use of subsidised financing for future EU activities. By contrast, in ADNOC/Covestro the Commission relies on a novel IP-licensing remedy aimed at generating positive sector-wide effects. In other words, although the capital injection was considered a foreign subsidy, it was not unwound but effectively offset through commitments benefiting the broader sector.

The ADNOC/Covestro precedent shows that the Commission enforces the FSR in a creative and flexible manner that also aligns with EU strategic objectives, demonstrating that the FSR is a screening mechanism capable of shaping commitments that neutralise distortive effects while also supporting EU policy priorities.