EU Commission launches in-depth investigation into ADNOC’s acquisition of Covestro under EU Foreign Subsidies Regulation

On 28 July 2025, the European Commission launched an in-depth investigation under the Foreign Subsidies Regulation (Regulation (EU) 2022/2560, EU-FSR) to review the proposed acquisition of Covestro AG (Covestro) by Abu Dhabi National Oil Company PJSC (ADNOC). ADNOC is a state-owned petroleum and energy company based in the United Arab Emirates (UAE), whereas Covestro is a German chemical company. The objective of the Commission’s investigation is to determine whether foreign subsidies have been granted by the UAE that could distort the EU internal market.

The first in-depth investigation into an M&A transaction was launched around a year ago and concerned the acquisition of PPF Telecom Group (PPF) by Emirates Telecommunications Group Company PJSC (e&), a state-controlled telecommunications provider in the UAE. The Commission recently published its decision in relation to that case (here).

Following an overview of the Commission’s decision to open the in-depth investigation into Covestro we consider what type of remedies could be expected based on insights from the previous PPF decision in case the Commission comes to the conclusion that foreign subsidies have been granted that could distort competition.

A.   Launch of in-depth investigation into ADNOC/Covestro

The EU Commission has expressed concerns that ADNOC may have received an unfair advantage in its acquisition of Covestro through subsidies granted by the UAE. The subsidies include an unlimited state guarantee and a committed capital increase in favour of Covestro. The transaction with a total value of EUR 14.7 billion (including debt, up to approx. EUR 16 billion) received merger clearance by the Commission in May 2025 due to the lack of any significant overlaps between the parties’ business activities. The FSR investigation, on the other hand, focuses on whether foreign subsidies distorted the bidding process or could engender negative effects on competition in the internal market after the takeover. The Commission’s decision is expected by 2 December 2025.

B.   Comparison with PPF Telecom Group case

The 2024 acquisition of PPF by e& may serve as a blueprint case, as it also fell under the EU-FSR and involved similar state subsidies from the UAE. In the PPF case, the Commission launched an in-depth investigation after receiving indications of an unlimited state guarantee and other financial support measures. These subsidies would have allowed e& to carry out the acquisition on terms which, according to the Commission, could have resulted in potential distortions of competition in the EU telecommunications sector. The Commission approved the PPF acquisition in September 2024, subject to the following conditions:

• Removal of unlimited state guarantee: e& agreed to remove the unlimited state guarantee (primarily an exemption from the insolvency law of the UAE).
• Waiver of subsidies for EU activities: e& had to provide assurances that no foreign subsidies would flow into the merged entity's business activities in the EU (with the exception of emergency financing which would be reviewed by the Commission).
• Transparency and reporting obligations: The Commission imposed reporting obligations to ensure compliance with the conditions. Further, e& must inform the Commission of any future acquisitions even if these are not subject to notification under the EU-FSR.

The remedies therefore aimed at minimizing distortions of competition without entirely blocking the transaction. The Covestro case highlights both similarities and differences. Similar to PPF, it raises concerns that ADNOC has gained an unfair advantage through an unlimited state guarantee. Like e&, ADNOC is a state-owned entity from the UAE. A key difference lies in the sectors concerned: while PPF Telecom operates in the regulated telecommunications sector, which is of significant interest to the EU's critical infrastructure, Covestro concerns the chemical industry, which is less directly linked to public security or strategic infrastructure. Nevertheless, Covestro is a leading supplier of high-performance polymers used in strategic industries such as automotive, construction, and electronics.

C.    Prospects for ADNOC/Covestro proceedings

The Commission’s remedies in the PPF case could provide a blueprint for possible conditions in the Covestro case, but the Commission will have to adapt them to the specific circumstances. The decision to launch an in-depth investigation does not prejudge the outcome. The Commission is therefore first going to assess whether in the present case:

(i)    foreign subsidies have been granted, 

(ii)   these subsidies are likely to distort competition in the internal market, while

(iii)  the Commission will also have to consider potential positive effects of the subsidies on the development of the subsidized economic activity in the EU.

Notably, unlimited state guarantees for debts or liabilities are among the key instances of subsidies most likely to distort the internal market (cf. Article 5(1)(b) EU-FSR). Arguing potential positive effects outweighing the negative ones might therefore be an 'uphill battle' for ADNOC. In its PPF decision, the Commission also clarified that, to be considered in the balancing test, positive effects must be directly attributable to the subsidies themselves and not merely a consequence of the transaction as such.

If the transaction is likely to distort competition in the internal market as a result of the foreign subsidy, the Commission may accept commitments offered by ADNOC. Based on insights from the Commission’s decision in the PPF case, the following types of remedies might be expected:

• Revocation of the unlimited state guarantee: Similar to the PPF case, the Commission could impose an obligation to revoke the state guarantee granting ADNOC favourable financing conditions. In the PPF case, the Commission found unlimited guarantees to exist due to (i) the legal regime applicable to e& in the event of insolvency, (ii) expectations of investors, which are reflected in the exceptionally high credit rating of e&, (iii) the role of the Emirates Investment Authority (EIA) as the government-owned sovereign wealth fund of the UAE, and (iv) the specific rights granted to the UAE's government (through the EIA) related to e&’s assets.

•   In its investigation, the Commission focused on the applicability of the UAE's 2016 Bankruptcy Law and the extent to which a deviation from those general insolvency regulations may constitute an unlimited state guarantee. The Commission emphasized that such a deviation might lead investors to expect the government to intervene in the event of financial distress. It is to be expected that the Commission will thoroughly examine the circumstances surrounding the insolvency regulations in the Covestro case as well, since the stipulations in the articles of association of e& and ADNOC related to this issue are almost identical.

•   In the PPF case, the Commission found it to be highly likely that the UAE would provide e& with additional liquidity in the form of equity, loans or similar financial measures in the event of an impending insolvency. Although no legal obligation to provide any guarantee or bail-out support exists, the Commission deemed the circumstances sufficient to assume reasonable investor expectations, due to the public support of e& by the government (this expectation also being informed by prior government intervention when Dubai World, a UAE government-owned investor, faced financial difficulties in 2009). The same expectation could be justified in relation to ADNOC.

•   However, the PPF case also differs significantly as regards the EIA’s role as “special shareholder” imbued with certain rights to control the process in case of an insolvency, inter alia, to veto the application of bankruptcy proceedings and, thus, avoid insolvency proceedings potentially indefinitely. The articles of association of ADNOC do not include a comparable provision. 

•   Furthermore, the EIA was granted special rights in case of insolvency to purchase e&’s assets and continue its operations for a period of up to 24 months. A similar special shareholder with comparable rights does not appear to exist in relation to ADNOC.

In its PPF decision, the Commission based its finding of an unlimited state guarantee predominantly on the aspects surrounding the insolvency regime, while the preferential asset purchasing rights and permission to continue the telecommunications operations were deemed justified to ensure the continuity of services. It remains to be seen whether the Commission considers the circumstances in the Covestro case to be sufficient to constitute an unlimited state guarantee.

• Restriction on capital increases: The envisaged capital increase in favour of Covestro might be limited to a framework in line with market conditions or withdrawn altogether to prevent it from being considered a subsidy potentially distorting competition in the EU.

•   Although the capital increase would be conducted only after the transaction is executed, ADNOC’s commitment to the tune of EUR 1.17 billion might be found to have influenced the bidding process, e.g. if ADNOC could offer above-market conditions funded by subsidies, or if the committed capital increase deterred other bidders from participating in the first place. On the other hand, the bidding process should not have been affected if ADNOC had sufficient own funds or if there were no competing bidders anyway.

•   Furthermore, the capital increase might also be found to distort competition after the transaction has been executed if it creates unjustified financial benefits. Like in the PPF case, in which capital investments by EIA and e& into PPF for its activities within the EU internal market were prohibited, the Commission might consider whether the capital increase should be limited and/or prohibited.

• Monitoring and reporting obligations: As in the PPF case, regular reports on compliance with the conditions might be required to ensure long-term control of distortions of competition.
• Further potential commitments are set out in Article 7(4) of the EU-FSR.

In the PPF case, the commitments were adopted taking into account the comments and observations from competitors following market testing. The same procedure can be expected here

D.   Conclusion

The Commission’s in-depth investigation into ADNOC's takeover of Covestro demonstrates its commitment to enforce the EU-FSR and utilize its toolset to ensure effective competition in the EU internal market. Contrary to initial expectations, the first in-depth M&A proceedings have focused on the UAE rather than China.

Should the Commission find in the Covestro case that foreign subsidies have distorted the internal market, our analysis of the PPF case suggests that those concerns could be addressed by remedies rather than an outright prohibition. This would be good news for companies (especially state-owned companies) who are planning investments into the EU.
Companies envisaging M&A deals involving (indirect) state funding should however keep the timelines for the different regulatory clearances (merger control, FDI, EU-FSR) on their radar to avoid any unexpected delays. ADNOC notified the Covestro transaction under the EU-FSR on 15 May 2025, after receiving merger clearance under the EUMR on 12 May 2025. This suggests that numerous questions had to be clarified during EU-FSR pre-consultation proceedings. The Commission’s initiation of an in-depth investigation, nonetheless, highlights the importance of anticipating regulatory obstacles and coordinating approval processes in advance.

PwC Legal advises companies on all matters relating to the EU-FSR. Our cross-jurisdictional team comprises proven experts in antitrust, public procurement and state aid law. 
If this topic is of relevance to your company, we cordially invite you to participate in our upcoming EU-FSR conference in partnership with ACC Europe on 22 October 2025 in Brussels. Further information can be accessed here.