ADNOC/Covestro: What Can We Learn from the Second FSR Phase II Merger Decision?

The provisional public version of the Commission’s decision in ADNOC/Covestro adds another building block to the FSR playbook. The Decision shows how much weight the list of the “most likely distortive” subsidies under Article 5 has in the Commission’s assessment and clarifies the concept of “foreign subsidy directly facilitating a concentration”. For the first time, a distortion in the acquisition process is detected. The commitments agreed contain many clauses that ensure that Covestro’s patents will remain accessible to the European chemical sectors, suggesting that the FSR can host industrial policy considerations and serve well the priorities of Executive Vice President Ribera.

Introduction

In February 2026, the Commission published the provisional public version of its decision with commitments in the ADNOC/Covestro case. The Decision, which came at the end of an in-depth investigation, adds a new layer to the Commission’s nascent FSR case law. Beyond refining the distortion analysis – reinforcing the approach reflected in the e&/PPF Telecom Group decision and the more recent Guidelines – the Decision stands out for the accepted commitments . The Commission cleared the deal subject to an unprecedented commitments package. Curiously, the first two “in-depth” FSR decisions both involve Emirati companies under the concentration procedure.

On 15 May 2025, the Abu Dhabi National Oil Company (ADNOC), a State-owned oil and gas producer based in the UAE, notified the Commission its intent to acquire sole control over Covestro, a chemicals producer based in Germany. The Commission opened an in‑depth investigation on 28 July 2025 and conditionally approved the acquisition on 14 November 2025. A provisional public version followed in February 2026. The blogpost analyses the decision in detail, following the logical process of the Decision and highlighting its main points of interest and what lessons we can learn, with a look ahead to future enforcement.

Existence of Foreign Subsidies under Article 3

During the preliminary phase, the Commission found “sufficient indication” (17) of the existence of foreign financial contributions which could amount to foreign subsidies under Article 3 FSR, or even to “most likely distortive” subsidies under Article 5. Before discussing the subsidies, the Decision reconstructs ADNOC’s relationship with the government of Abu Dhabi, one of the emirates that compose the UAE.

The Commission identifies three interventions that qualify under Article 3 FSR:

1.      Unlimited Guarantee (7.1): Abu Dhabi grants ADNOC an unlimited guarantee in the form of an exemption from the UAE Bankruptcy Law. Such guarantees fall within the category of subsidies most likely to distort under Article 5(1). The State guarantee is liable to improve the expectations of market participants that their claims will be honoured, hence leading to preferential financing terms in financial and commercial agreements (158).

2.      Capital Increase (7.2), in the form of a capital injection to Covestro, is a financial contribution consisting of a transfer of funds within the meaning of Article 3(2)(a) FSR (206).

3.      Fiscal Agreements (7.3): the Commission finds that, inter alia, free‑zone exemptions in the UAE (283), tax holidays and fiscal‑letter reductions (284) amount to a foregoing of revenue that would otherwise be due, hence qualifying as foreign subsidies within Article 3 FSR (275).

The three interventions fulfil all the requirements to be qualified as a foreign subsidy within the meaning of Article 3 FSR: they constitute (1) financial contributions (2) attributable to a third country and (3) limited “in law and in fact” (viz., specific) to ADNOC, which (4) benefits from them. All three forms of foreign subsidies were granted within the three years prior to the announcement of the public bid, thus meeting the temporal requirement in accordance with Article 19 FSR.

Before the Distortion Test: the Presence of “Most Likely Distortive” Subsidies under Article 5

Even before conducting the distortion test proper under Article 4(1) FSR, the Commission verifies whether a subsidy falls under the list in Article 5(1). In that event, there is a (rebuttable) presumption of distortion. As explained by the FSR Guidelines, for these subsidies “it is not necessary for the Commission to perform a detailed assessment based on indicators” (12, 46). In ADNOC/Covestro, the Commission finds that two out of the three categories of foreign subsidies identified could fall under Article 5(1) FSR, namely the Unlimited Guarantee and the Capital Increase.

For the Unlimited Guarantee, the Commission finds that the “coupling between ADNOC and the State” reduces its exposure to commercial risk compared to non-subsidised market participants (335), and that it is capable of altering “the exposure to commercial risk and market discipline of the beneficiary undertaking” (333), with distortive effects in the internal market. Such financial and commercial benefits could then be transferred to its subsidiaries ­– including Covestro, once acquired. The likely result is a credit‑rating uplift and preferential financing for Covestro’s future operations.

For the Capital Increase, the Decision finally clarifies the concept of subsidy “directly facilitating the concentration” under Article 5(1)(d), a point left open in e&/PPF Telecom Group. The capital increase is described as “instrumental” in the acquisition, as it “enabled ADNOC to acquire a company that it would not otherwise have acquired” (355-356). As shown by internal documents and the Parties’ submissions, it was Covestro that ultimately requested the Capital Increase so as to maximise ADNOC’s chances of “obtaining a positive recommendation of the Offer by Covestro’s management”. The Capital Increase does not amount to a mere “effect” of the concentration; on the contrary, a subsidy agreed to unlock the negotiations and allow the transaction to materialise “qualifies as directly facilitating” under Article 5(1)(d). (367)

In conclusion, the Decision confirms how central the qualification of a subsidy as “most likely distortive” is in the overall FSR assessment and in the dialogue between the Commission and the private parties.

Distortion(s) in the Internal Market: the “Core” Test under Article 4

After assessing the presence of “most likely distortive” subsidies, the Commission conducts the distortion test under Article 4(1) – for a theoretical overview and comparison with State aid, see Hornkohl and Mattiolo. To summarise, there are two cumulative “limbs” of the distortion test under Article 4(1): (1) the improvement in the competitive position of the subsidised undertaking and (2) the potential or actual negative effects on competition. For the concentration procedure, as shown already in e&, this double test is conducted in relation to both the acquisition process and the post-transaction activities of the merged entity.

In ADNOC, after having established that two of the three categories of subsidies fall under Article 5(1), the Commission moves to test whether the combination of the Capital Increase, the Unlimited Guarantee and the contested Fiscal Agreements satisfies both limbs of the distortion test. Although such an assessment is, strictly speaking, not required for the subsidies falling within the categories listed in Article 5 FSR (329), the Commission nevertheless carries out an “overall assessment”, taking into account the most relevant indicators, including (but not limited to) those set out in Article 4(1) FSR. For the first time, the Commission establishes the existence of distortions both during the transaction process and post-transaction. However, similarly to e&/PPF, the principal harm materialises in the post-concentration activities of the merged entity.

Distortion in the acquisition process

For the first limb of the test, the Commission finds that the foreign subsidies are capable of improving ADNOC’s ability to pursue and secure the acquisition, in particular by conferring a non‑insignificant benefit that enables it to offer an acquisition price the Commission considers overvalued (394). For the actual or potential negative effects on competition, the Commission finds that the presence of the subsidy has altered, first of all, the behaviour of the subsidised undertaking (ADNOC), which “would not have made the same offer and/or accepted the same risks” (408). The price offered by ADNOC is high compared to the market benchmarks (409-437), and its investment strategy goes beyond that of any typical private investor, as it accounts for “Abu Dhabi’s overall ambition to diversify its sources of revenue”.

Furthermore, the subsidies may have affected the behaviour of other economic actors. Based on a counterfactual analysis (449), the Commission considers that, absent the foreign subsidies (mainly the Capital Increase), “the Transaction would likely not take place” and that Covestro would continue to operate on a standalone basis – without facing any economic distress – until the receipt of a potential offer. “The very presence of ADNOC may have created a chilling effect on potential acquirers, […] [who] may have perceived the Offer as unmatched – or unmatchable – in terms of scale” (452). Nevertheless, absent potential acquirers, the Commission concludes that “the harm to the acquisition process and to potentially competing acquirers is limited”.

Distortion in the activities of the combined entity post-concentration

Each of the foreign subsidies is liable to confer a benefit to the activities of Covestro in the internal market: the Unlimited Guarantee, “by allowing it to raise financing for its operations […] at preferential conditions” (469); the Capital Increase, by providing additional capital capable of being “deployed in growth projects” (470); the Fiscal Agreements, by freeing additional resources for investments in the internal market (471). Such benefit is cumulatively very significant, given the overall amount of the subsidies.

As for the second limb of the distortion test, the Commission, on the basis of the internal documents reviewed (largely confidential), considers that there is “cogent evidence that access to ADNOC’s funding commitments is capable of affecting Covestro’s activity in the internal market by contributing to a more aggressive investment strategy”, through concrete “growth projects” (505-506). The Commission reaches a similar conclusion when assessing the interference with the other competitors in the market. First, it considers Covestro’s positioning in the chemical sector as “a competitive force and innovation driver in the internal market” (511); second, it takes into account the characteristics of the chemical sector, “cyclical in nature and structurally constrained due to high fixed costs, energy dependence and regulatory burdens” (518), where competitiveness relies heavily on investments.

Against this background, Covestro’s unconstrained growth, fuelled by the foreign subsidies, “is likely to worsen the competitors’ competitive position in the market” (524). Indeed, “absent the transaction”, Covestro would not have carried out further investments “to the same extent and with the same timing”, thus interfering with the competitive dynamics of the market. Against a counterfactual where Covestro would have continued to operate as a standalone company with its own investment strategy, the Commission concludes that the subsidies are likely to distort competition in the post-transaction market.

The Balancing Test under Article 6

Having established the distortion, the next step of the Commission’s assessment is the balancing test. The Decision restates Article 6 and recital 21 and the categories of positive effects to be considered (535–539). For a theoretical overview of the balancing test, see Hornkohl & Mattiolo on World Competition. From the Commission’s press release following the announcement of the provisional decision, one might have thought the Commission balanced the negative effects (“the benefit to the market operators stemming from the access to Covestro sustainability patents will balance out the negative effects of the transaction on the internal market”). That is not what happens in ADNOC, nor is it what Article 6 FSR actually does. The balancing test concerns the positive effects of the subsidy, not of the commitments. In line with e&/PPF, the Commission requires the parties to substantiate claimed positive effects during the investigation (540). Here, the positive effects are not proven to be subsidy‑specific or necessary for the benefits to occur, for example by showing they would not have arisen absent the subsidies (545–546). As a result, the Commission moves to the assessment of the remedies – in this case, the proposed commitments – which are assessed against the full set of distortions identified, with no offset for positive effects (553).

In their submissions, the parties argue that the alleged foreign subsidies would generate positive effects linked to EU objectives on circularity and climate neutrality or environmental protection; social standards; innovation and R&D; addressing market failures; and so on. What is interesting to observe is that undertakings can try to link their subsidies with the goals pursued by EU industrial policies. Nevertheless, since ADNOC has a similar outcome to e&, we will need to wait a little longer before seeing the FSR balancing test in action.

The Decision on Commitments under Article 7

The Commission finally examines whether the commitments fully and effectively remedy the distortion and are proportionate, as required by Article 7 FSR. The commitments are divided into two packages of measures.

1.      The package removing the effects of the Unlimited Guarantee: upon completion of the transaction, the companies of the ADNOC group are to be treated as commercial companies for insolvency purposes and subject to the applicable insolvency regime. No subsequent action or amendment to ADNOC’s Articles of Association will derogate from, or conflict with, this outcome (562).

2.      The package to ensure access to Covestro’s intellectual property: following a market test, the initial IP commitments were strengthened (584). Covestro will honour market‑standard licensing requests for its sustainability patents, except for eight competitors on an Exclusion List. Licences can be used to manufacture within the EU for worldwide sales. Covestro will honour existing competitor R&D cooperations and maintain a patenting policy consistent with German law.

To ensure effectiveness, the commitments are implemented under the supervision of a monitoring trustee, with enhanced transparency obligations and protection through a fast‑track dispute resolution procedure (569). The Commission considers that the final commitments fully and effectively remedy the distortions caused by the foreign subsidies and therefore clears the transaction (603). Given that the Commission sees sustainability as core to the future development of the EU chemical industry, it expects that access to Covestro’s sustainability patents will support continued production in Europe and additional M&A opportunities.

Conclusions: What Stands Out in ADNOC/Covestro and What It Means for Practice

The second FSR phase II decision by DG COMP offers several interesting insights. First of all, the Commission’s positive assessment of the IP commitments ­is not framed as a direct “neutralisation” of the effects of the identified subsidies. Notwithstanding the limited weight ultimately given to Article 6’s balancing test, the Decision suggests that broader policy-relevant considerations may still play a meaningful role at the remedies stage under Article 7; provided that the commitments are capable of effectively addressing the competitive concerns identified. Parties should approach remedies creatively and proactively, testing a wider range of solutions while keeping the core benchmark in sight: the Commission wants to restore a level playing field in the internal market. The Decision shows flexibility in framing theories of harm and selecting remedies, with the aim of promoting the EU’s industrial objectives on sustainability and innovation in the chemical sector. As discussed by Modrall, Paoli and White in a blogpost from December 2025, the policy considerations in ADNOC reflect an emerging theory of harm relating to innovation competition and align with the mandate in Ribera’s mission letter to “modernize the EU’s competition policy to ensure it supports European companies to innovate, compete and lead worldwide and contributes to our wider objectives on competitiveness and sustainability, social fairness and security.”

Second, the “most likely distortive” subsidies categories under Article 5 are central in the Commission’s assessment. The enforcer devotes significant attention to identifying these categories, which act as the cornerstone of the theory of harm and as a key lever for designing remedies. The Decision adopts a very extensive approach in establishing foreign subsidies directly facilitating a concentration under Article 5(1)(d). We can cautiously suppose that the Commission focuses its enforcement on the cases where Article 5 subsidies are present. This would be a rational approach, considering its limited resources and the high number of notifications. Finally, unlike in e&/PPF, the Commission confirms the distortion also in the context of the acquisition, although the main focus remains on the post-transaction effects. In this regard, the prospective nature of the assessment under the FSR follows a logic comparable to the one that drives EU merger control.