The EU's ADNOC-Covestro Subsidy Probe: Implications for Cross-Border M&A and Strategic Sectors

The European Commission’s ongoing investigation into Abu Dhabi National Oil Company’s (ADNOC) €14.7 billion acquisition of German chemicals giant Covestro has become a litmus test for the EU’s Foreign Subsidies Regulation (FSR). This case, which centers on allegations that UAE state support distorts EU market competition, underscores a broader shift in regulatory priorities. For foreign investors—particularly those backed by non-EU governments—the FSR is reshaping the risk-reward calculus of cross-border M&A, especially in strategic sectors like clean energy, telecommunications, and defense.

The ADNOC-Covestro Case: A Regulatory Crossroads

According to a report by Reuters, the EU has paused its in-depth probe into the ADNOC-Covestro deal to gather additional information, with a final decision expected by December 2, 2025 [1]. The Commission’s preliminary concerns revolve around an unlimited state guarantee from the UAE and a committed capital increase by ADNOC, which it argues may have allowed the acquirer to secure the deal under non-market conditions [2]. ADNOC has contested these findings, asserting that the transaction aligns with market principles and will proceed after a full review [4].

This case exemplifies the FSR’s dual focus: ensuring fair competition while safeguarding EU economic sovereignty. The Commission’s scrutiny of state-linked financing—particularly in sectors critical to energy transition and industrial competitiveness—signals a new era of regulatory vigilance.

The FSR’s Framework: Thresholds, Scrutiny, and Sectoral Priorities

The FSR, enacted in July 2023, mandates pre-merger notifications for transactions where the target generates at least €500 million in EU turnover and the parties received over €50 million in foreign financial contributions (FFCs) from non-EU governments in the past three years [1]. These FFCs include direct grants, tax exemptions, and state-backed guarantees, with the latter being a focal point in the ADNOC-Covestro case.

The regulation’s scope extends beyond M&A to public procurement, with the Commission already investigating Chinese wind turbine suppliers and security equipment firms [5]. Strategic sectors like clean energy and defense are prioritized, as highlighted in the EU’s January 2025 Competitiveness Compass [3]. For instance, the EC’s first conditional approval under the FSR—the UAE’s e& acquisition of PPF Telecom Group—required the removal of an unlimited state guarantee and restrictions on intra-group financing [2].

Navigating Risks: Compliance Strategies and Remedies

For foreign investors, the FSR demands proactive compliance strategies. A report by Baker Botts notes that companies must conduct internal audits of financial flows, identify fungible subsidies, and structure deals to address potential remedies [1]. In the e&/PPF case, behavioral commitments—such as ringfencing EU operations from non-market subsidies—proved sufficient to secure approval [2].

However, structural remedies remain a possibility in cases where distortions are deemed severe. The EC’s enforcement toolkit also includes unannounced inspections, as seen in dawn raids on Chinese security firm Nuctech [5]. These actions emphasize the need for transparency and contingency planning.

Opportunities in a Shifting Landscape

While the FSR introduces friction, it also creates opportunities for investors who adapt. The EC’s focus on strategic sectors suggests that compliant investments in clean energy or critical infrastructure could still gain traction. For example, the Commission has granted waivers in cases with no clear link to market distortions [4], indicating a nuanced approach.

Moreover, the FSR’s guidelines, expected in January 2026, will provide clarity on distortion criteria and balancing tests [2]. This could streamline future reviews and reduce uncertainty for investors willing to engage early with regulators.

Conclusion: A New Normal for Foreign Investment

The ADNOC-Covestro probe is emblematic of the EU’s evolving stance toward foreign state-backed investments. While the FSR’s broad scope and focus on strategic sectors pose risks, they also incentivize transparency and strategic alignment with EU priorities. For investors, the path forward lies in integrating FSR considerations into deal planning, leveraging behavioral remedies, and capitalizing on sectors where the EU seeks to bolster competitiveness.

As the EC refines its enforcement approach, the coming months will test whether the FSR can balance regulatory rigor with market openness—a balance critical to the EU’s economic future.

Source:
[1] EU regulators set to pause subsidy probe into ADNOC's Covestro deal, [https://www.reuters.com/legal/litigation/eu-regulators-set-pause-subsidy-probe-into-adnocs-covestro-deal-source-says-2025-09-03/]
[2] EU Foreign Subsidies Regulation & M&A, [https://www.bakerbotts.com/thought-leadership/publications/2025/july/eu-foreign-subsidies-regulation-ma-latest-developments-and-implications-for-deal-strategy]
[3] The EU Foreign Subsidies Regulation: is the defense sector a target?, [https://foleyhoag.com/news-and-insights/publications/alerts-and-updates/2025/june/the-eu-foreign-subsidies-regulation-is-the-defense-sector-a-target/]
[4] The Foreign Subsidies Regulation: Where Do We Stand 18..., [https://www.arnoldporter.com/en/perspectives/advisories/2025/05/the-foreign-subsidies-regulation-where-do-we-stand]
[5] The EU Foreign Subsidies Regulation: 2024 in Review and Predictions for 2025, [https://www.clearygottlieb.com/news-and-insights/publication-listing/the-eu-foreign-subsidies-regulation-2024-in-review-and-predictions-for-2025]