A New Approach to Sustainability in EU Merger Cases?

Does the European Commission’s (Commission’s) second conditional approval under the Foreign Subsidies Regulation (FSR) signal a new approach to sustainability issues in EU merger cases?  On November 14, 2025, the Commission approved the acquisition of Covestro AG (Covestro), formerly Bayer Material Science AG – a German producer of advanced plastics and chemical materials – by Abu Dhabi National Oil Company PJSC’s (ADNOC’s) – the national oil company of Abu Dhabi.  Executive Vice President (EVP) Ribera announced:

“We have carefully assessed the foreign subsidies involved in this transaction to ensure a fair and competitive internal market. Our review confirmed that the commitments offered by ADNOC effectively address the potential negative effects by allowing market participants to access key Covestro patents in the field of sustainability. Clear, pre-defined access to these patents will enable others to innovate and advance research in an area that is critical for Europe’s future.”

Thus, possibly for the first time, the Commission required a remedy to promote innovation and research in relation to sustainability as a condition to approving a concentration.  This decision aligns with the mandate in Ribera’s mission letter to “modernise the EU's competition policy to ensure it supports European companies to innovate, compete and lead world-wide and contributes to our wider objectives on competitiveness and sustainability, social fairness and security.”

Similarly, in connection with the ongoing review of the Commission’s horizontal and non-horizontal merger guidelines (the HMG and NHMG, respectively; together, the Merger Guidelines), EVP Ribera promised to

“modernise the way we identify mergers that could harm European companies or consumers, while also providing clear guidance on the types of growth and scale that strengthen the Single Market. . . . Our revised [Merger] Guidelines will provide clear and upfront guidance, including concrete criteria on when scale can benefit the Single Market[, and p]rovide guidance on mergers that may support competitiveness, innovation, and resilience.”

In the past, however, the Commission has rejected demands to consider broader policy concerns in connection with EU Merger Regulation (EUMR) reviews (see, e.g., Bayer/Monsanto, para. 3021).

This article discusses the similarities and differences between the Commission’s remedial powers under the FSR and the EUMR and considers the extent to which ADNOC/Covestro may presage a more policy-oriented approach to theories of harm (and thus remedies) under the FSR and the EUMR. These considerations are necessarily preliminary, since the Commission’s complete decision in ADNOC/Covestro is not yet public.

FSR Theories of Harm and Remedies

The FSR aims to “address distortions caused, directly or indirectly, by foreign subsidies, with a view to ensuring a level playing field. This Regulation lays down rules and procedures for investigating foreign subsidies that distort the internal market and for redressing such distortions” (Article 1(1) FSR).  The FSR includes separate procedural frameworks (or “modules”): (i) ex officio investigations launched by the Commission on its own initiative and review of mandatory notifications of (ii) concentrations and (iii) public tenders meeting certain thresholds.

In the concentration context, the FSR notes that “[f]oreign subsidies can distort the internal market . . . [when they enable] a change of control over Union undertakings, where such concentrations are fully or partially financed through foreign subsidies” (Recital 4).  Under Article 19, the Commission must assess “whether a foreign subsidy in a concentration distorts the internal market” by considering only the concentration concerned and “foreign subsidies granted in the three years prior” to the deal.  Among the categories of foreign subsidies considered most likely to distort competition, the only concentration-specific example is foreign subsidies that directly facilitate a concentration and thereby distort the acquisition process itself – for example, by enabling a company to outbid or deter rival bidders when acquiring an EU undertaking (Article 5(1)(d) FSR).

However, a 2024 FSR staff working document noted that foreign subsidies may distort not only the acquisition process itself, but potentially also the merged entity’s activities to the extent that the effects of foreign subsidies granted before the acquisition have not “materialised” at the time the concentration is completed (para. 7).  The Commission’s 2025 draft FSR guidelines also distinguish  between distortions of competition in the acquisition process and distortions arising post-transaction, further distinguishing between the operating or investment decisions of the subsidised undertaking and distortions at other levels of the value chain (Section 2.4.4).

Where the Commission identifies a risk that foreign subsidies will distort the internal market, Article 7 FSR authorizes it to “impose redressive measures” (Article 7(1)) or “accept commitments” (Article 7(2)) provided that they are “proportionate and fully and effectively remedy the distortion actually or potentially caused by the foreign subsidy in the internal market” (Article 7(3)).  Article 7.4 provides examples, including “the licensing on fair, reasonable and non-discriminatory terms of assets acquired or developed with the help of foreign subsidies.” 

The ADNOC/Covestro Remedy Package

In July, the Commission launched an in-depth investigation to determine whether “foreign subsidies may have enabled ADNOC to acquire Covestro at a valuation and financial terms that would not be in line with market conditions, and which could not have been matched by unsubsidised investors.” The Commission was also concerned with whether “the transaction could allow ADNOC to adopt investment strategies that would impact competitive conditions in the internal market.”  More specifically, the Commission wanted to assess whether “foreign subsidies that ADNOC may have received distorted the outcome of the acquisition process … [and] [w]hether such potential foreign subsidies may lead to negative effects in the internal market with respect to the merged entity’s activities after the transaction” (emphasis in original).

In its investigation, the Commission found that ADNOC and Covestro received foreign subsidies that were liable to distort the EU internal market.  These included an unlimited State guarantee to ADNOC, which the FSR identifies as among foreign subsidies most likely to distort the internal market, as well as a committed capital increase into Covestro and certain tax measures. According to the Commission, these foreign subsidies could have affected competition in the acquisition process, because the conditions offered, including the capital increase, may have deterred other investors from making an offer.  The Commission further found that the foreign subsidies, and in particular the unlimited State guarantee, would be likely to distort competition after the transaction.  Specifically, the capital increase and State guarantee would have improved the ability of the merged entity to finance its activities and potentially increased its propensity towards risky behaviour (e.g., adopt more aggressive investment strategies than would have occurred absent the subsidies). To address the Commission’s guarantee-related concerns, , ADNOC agreed to become subject to ordinary insolvency law, in line with a prior case. 

ADNOC also committed to license Covestro’s patents “in the area of sustainability” to certain market participants at transparent terms and conditions set in advance, for a period of 10 years plus the lifetime of any licensing agreement entered into during this time.  According to the Commission, this commitment benefits competitors that are particularly reliant on access to Covestro’s sustainability technology and will “balance out the negative effects of the transaction on the internal market … in particular thanks to the potential spillover effects for innovation in the chemical industry at large and … in its sustainability segment”.   

Notably, the Commission’s press release did not specify whether and if so how ADNOC’s capital commitment or the referenced tax measures represent foreign subsidies received in the three years prior to the transaction, nor did it set out how such subsidies were likely to distort competition specifically in relation to sustainability innovation.  The Commission did not allege that Covestro’s patents were developed with the help of foreign subsidies, as envisaged for licensing remedies in Article 7.4 FSR.  The Commission also described the remedies as “balancing” potential negative effects but did not say it was applying the FSR’s so-called “balancing test” in Article 6 FSR.

The Commission’s press release also does not elaborate on how the commitments address specific distortion risks.  Since the commitments did not change the acquisition terms, they presumably are not intended to address distortions of the acquisition process.  Since the unlimited State guarantee was removed, moreover, the remaining concerns must relate to ADNOC’s capital commitment or the referenced tax measures.  It is not clear how these would increase Covestro’s propensity for risky behavior post-transaction or why such behavior would put competitors’ access to Covestro’s sustainability technology at risk.

However, Covestro does highlight sustainability as a “key pillar” of its group strategy and emphasizes sustainable production practices.  More specifically, Covestro is focused on using 100 percent energy from renewable sources, 100 percent alternative raw materials, and innovative recycling technologies.  Covestro also engages in a number of bilateral and multi-lateral innovation partnerships.

It is not clear whether ADNOC’s commitments merely preserve these partnerships or go further, requiring Covestro to license more technology, or the same technology to more licensees. The Commission may have concluded that Covestro’s potentially more risky behaviour post-transaction could have included termination of existing partnerships and that Covestro’s current partners’ sustainability innovation efforts would be impaired as a result.  Or the Commission may have concluded that avoiding distortions to sustainability innovation competition would require Covestro to adopt a more open technology license policy than it has adopted so far.

In any event, ADNOC/Covestro appears to adopt a flexible approach to theories of harm and remedies aiming to promote the EU’s sustainability and innovation goals.  The decision also arguably reflects a new theory of harm to innovation competition, one that is not based on a loss of innovation competition between merging parties, as the Commission unconditionally approved the deal under the EUMR in May.  The final FSR decision will provide insight into the Commission’s reasoning and the evidence that proved sufficient to satisfy the Commission’s burden of proof.   Might this decision presage a more flexible, policy-oriented approach to EU merger remedies as well?

Implications for EUMR Review

As noted, the Commission is currently reviewing its decades-old Merger Guidelines.  This review has prompted calls for a re-examination of the Commission’s traditional approach to efficiencies, particularly in relation to sustainability benefits (see here).  In view of the ADNOC/Covestro, does the EUMR provide similar scope for the Commission to consider potential threats to sustainability and impose appropriate remedies?

Arguably, the EUMR text and related case law provides equal or even greater flexibility than the FSR and related guidance in relation to theories of harm and remedies. The EUMR’s objective is to “permit effective control of all concentrations in terms of their effect on the structure of competition in the Union” (Recital 6 EUMR). A concentration is incompatible with the Union market if it “significantly impede[s] effective competition, in the common market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position” (Article 2(3) EUMR).  The Commission can nonetheless approve a concentration subject to “conditions and obligations intended to ensure that the undertakings concerned comply with the commitments they have entered into” to modify a concentration such that it no longer results in such a significant impediment to effective competition (SIEC).  The EUMR does not contain a list of potential remedies comparable to Article 7 FSR, but the EU Commission’s 2008 notice on remedies acceptable under the EUMR (the Remedies Notice) notes that “a general distinction can be made between divestitures, other structural remedies, such as granting access to key infrastructure or inputs on non-discriminatory terms, and commitments relating to the future behaviour of the merged entity” (para. 17).  “Other remedies” are further divided between access remedies, changes to long-term exclusive contracts and other non-divestiture remedies (paras. 61-70 Remedies Notice).

In its recent CK Telecoms judgment, the European Court of Justice noted that “merger control seeks precisely to examine how a concentration could alter the factors determining the state of competition on a given market in order to ascertain whether the concentration would result in a significant impediment to effective competition” (para. 162).  Although “the most direct effect of a merger will be the loss of competition between the merging firms” (para. 159), the Merger Guidelines also recognise theories of harm based on changes to the market structure.  The HMG note that a “merger in a concentrated market may significantly impede effective competition, through the creation or the strengthening of a collective dominant position, because it increases the likelihood that firms are able to coordinate their behaviour in this way and raise prices” (para. 39).  CK Telecoms notes, however, that “an exclusively price-focused approach for the purposes of classifying an undertaking as an ‘important competitive force’ would necessarily be incomplete” (para. 165).

In addition to non-price-related impediments, harms beyond an increased risk of coordination between market participants could, in theory, be captured by the concept of a SIEC.  For EUMR purposes, harms to the EU’s sustainability objectives, as well as harms to the EU’s resilience, security and incentive and ability to innovate, arguably could also affect the structure of competition in the EU.

The scope of the EUMR’s SIEC standard has been extensively debated.  While this standard has been linked by many commentators to the consumer welfare standard, neither the EUMR nor the Merger Guidelines specifically adopt it.  More recently, including at a 2023 OECD roundtable, there has been an increased level of debate around the boundaries of the consumer welfare standard.

We note that the Commission’s recent Merger Guideline consultation did not consider broadening the non-horizontal theories of harm that the EUMR can address.  Nonetheless, the ADNOC/Covestro remedies may signal greater openness to sustainability-related theories of harm, and thereby to greater acceptance of sustainability remedies that target such harm in EUMR cases.  While this could be characterized as a departure from past enforcement practice, such a change would seem consistent with EVP Ribera’s mandate to ‘modernise’ EU merger policy.

Conclusion

The Commission’s conditional approval of ADNOC/Covestro subject to a remedy to promote sustainability innovation in the chemical industry suggests that sustainability-related harms are in the scope of the FSR and the Commission can accept remedies to address such harms.  The Commission’s EUMR mandate to prevent harm to the structure of competition in the EU is arguably at least as broad as its FSR powers.

Broadening the theories of harm addressed in the Merger Guidelines to include structural harms to competition in sustainability innovation would align with EVP Ribera’s Mission Letter. A more flexible approach to merger remedies would also respond to the Draghi Report’s call to “increas[e] the weight of innovation and investment commitments in the EU’s rules for clearing mergers.”

Hopefully, after launching a welcome review of the Merger Guidelines, the Commission will also update the venerable Remedies Notice.  While the Commission’s experience with FSR remedies may be too limited to consider a formal FSR remedies notice, guidance on the Commission’s approach to FSR remedies would also be welcome.