Creative FSR Remedies to “Counterbalance” Ex-EU Subsidies and Support Sustainability Objectives in ADNOC’s Acquisition of Covestro

In only the second in-depth FSR clearance to date, the Commission has again required removal of an unlimited state guarantee. Notably, rather than removing the subsidy, it has also accepted a novel remedy to share the benefit of sustainability intellectual property as a counterweight to an ex-EU state-backed capital injection. The FSR is a geostrategic tool to protect EU interests. This case signals creativity to allow inbound investment and to shape remedies to align with wider EU objectives.

Key facts and timeline

• ADNOC, the Abu Dhabi state-owned energy and petrochemicals group, agreed in October 2024 to acquire Covestro, a German producer of advanced polymers for insulation, mobility and circular-economy applications, for approximately EUR 14.7 billion, including a capital injection into Covestro of EUR 1.17 billion.

• The transaction was cleared unconditionally under the EU Merger Regulation on 13 May 2025 (and in various other global jurisdictions) but also required EU clearance under the EU’s Foreign Subsidies Regulation (the “FSR”). This is only the second in-depth FSR review, and as with the first, concerns an acquirer backed by the United Arab Emirates (UAE).

• The Commission opened an in-depth FSR investigation on 28 July 2025, identifying concerns that ADNOC’s state backing could have enabled it to bid on terms not available to rivals who do not enjoy state support and could potentially distort competition post-transaction. Both the unlimited guarantee and the capital injection were flagged as possible subsidies.

• Detailed discussion about remedies followed, including a period when the regulatory clock was stopped. The Commission market-tested and refined these commitments and adopted a conditional approval on 14 November 2025. The full decision has not yet been published, but the remedies are outlined in the Commission’s press release and a non-confidential version has been published.

Commission’s Substantive Assessment

• The Commission’s review focused on whether ADNOC’s state support enabled terms not aligned with market conditions, specifically:
  • Its unlimited sovereign guarantee and related insolvency protections. This could lower its cost of capital and shift risk to the state, artificially improving its financing terms and strengthening its competitive position in bidding and post-transaction operations; and
  • ADNOC’s planned post‑closing capital injection of approximately EUR 1.17 billion into Covestro.

Conditions of clearance

• The Commission has cleared the transaction subject to two main remedies:
  • Neutralising the funding advantage from the unlimited state guarantee. ADNOC will amend its articles of association (and those of a subsidiary) to remove the unlimited sovereign guarantee and be subject to standard UAE insolvency rules. The Commission was satisfied that this directly addresses the cost-of-capital concern.
  • Safeguards on IP and collaborations. Covestro commits (i) to maintain existing R&D collaborations with its competitors and (ii) to license its existing and future sustainability-related patents on market-standard terms, with defined eligibility, scope and enforceable conditions, to eligible market participants (excluding competitors). The Commission found that this remedy will deliver spillover benefits for the chemicals industry, in particular by facilitating access to Covestro’s sustainability technologies.
• Notably, the Commission did not object to the capital injection that the German government was particularly focused on. Instead, it accepted remedies which it considered would balance out the negative effects of the transaction on the internal market.
• The commitments will last for 10 years, but the IP commitments will continue for the lifetime of any licensing agreement entered during that period. A monitoring trustee will be appointed.
• The procedural clock was stopped during the remedies discussion as the parties had not fully responded to an information request. However, once the remedies were agreed, the Commission backdated restarting the clock to the date on which the parties proposed the remedies package. Usually the clock is restarted from when the full response is received.

Creativity in a new regime

• The outcome in ADNOC / Covestro has similarities to the first in-depth FSR case (e& / PPF Telecom Group, discussed here): both concerned acquirers with UAE backing; both were cleared with commitments; and both required removal of an unlimited state guarantee by making the acquirer subject to ordinary UAE insolvency rules.
• In e& / PPF, the Commission also required additional ring‑fencing (including informing the Commission of certain future acquisitions and separation/financing safeguards). These do not appear to have been included in the ADNOC / Covestro
• The most notable differences are: first, the Commission’s acceptance of ADNOC’s post-closing capital injection into Covestro, despite flagging it as a foreign subsidy. No direct remedy has been applied to remove or mitigate the direct effects of this subsidy.
• Secondly, with the IP remedy, the Commission has sought to open up benefits flowing from the transaction to others in the sector—providing a counterweight to the foreign subsidy, not a block. The “counterweight” IP remedy will share Covestro’s proprietary sustainability IP across the sector.
• The FSR regime is proving itself to be a very different tool to intra-EU state aid controls. This case shows creativity being deployed not only to permit ex-EU state-backed investment into a capital-intensive EU sector but also to advance the EU’s wider policy objectives of driving decarbonisation.
• For future transactions, parties should bear in mind the scope for greater creativity in designing remedies. It may be possible to design a remedy generating sufficient benefits to the overall sector to neutralise any perceived harm from the ex-EU subsidy. Supporting a strategic goal of the EU, like sustainability, can clearly help.

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