May 24, 2025 | Industrials | Europe | Active
The European Union’s (EU) Foreign Subsidies Regulation (“FSR”) introduces new regulatory scrutiny for mergers involving entities backed by non-EU state support. Applicable since July 2023, the FSR was designed to close a major enforcement gap in the EU’s competition regime: while intra-EU subsidies are governed by State aid rules, foreign subsidies previously escaped oversight. Covestro / Abu Dhabi National Oil Company (“ADNOC”) falls under this regime, and on 15-May-25, the merger parties formally notified the European Commission (“EC”) under FSR, triggering a 25-working day Phase I review, with a decision deadline of 24-Jun-25. Unlike merger control, which the EC cleared unconditionally on 12-May-25, the FSR review focuses solely on the potential distortion of competition arising from foreign subsidies. In this context, ADNOC’s sovereign ownership and funding from the Emirati state have prompted scrutiny under a regulation designed to catch such government-backed bids. The EC has already shown it is prepared to go beyond formalities: in the PPF Telecom / Emirates Telecommunications Group (“PPF / e&”) precedent from last year, the only in-depth FSR case concluded so far, a UAE-backed acquirer had to withdraw an unlimited state guarantee and offer behavioural commitments to secure conditional clearance. Covestro / ADNOC will again test how stringently the FSR will be enforced in high-value industrial acquisitions involving state-linked Middle Eastern capital. In parallel, Germany’s foreign investment screening regime presents a second major hurdle for Covestro / ADNOC. The regime empowers the federal government’s Ministry for Economic Affairs and Energy (“BMWE”) to review, seek remedies, or prohibit transactions involving non-EU investors on national security or public order grounds (Following a ministerial reshuffle, the ministry was renamed from BMWK, with Katherina Reiche appointed as its new head.) The BMWE review is expected to display Germany’s evolving stance on foreign state-backed takeovers. While Minister Reiche has pledged greater speed and transparency in the screening process, the broader political climate remains cautious, and Covestro / ADNOC may ultimately test what the government deems acceptable in terms of national security policy. Together, the reviews place Covestro / ADNOC at the heart of shifting EU and German approaches to foreign state-backed investment. This 42-page report examines both regimes in parallel, drawing on case studies and lawyer insights to assess how evolving rules affect deal certainty for sovereign-linked buyers. We explore the risks these reviews introduce, with reference to Covestro / ADNOC, and how early engagement, financial transparency, and operational safeguards can mitigate intervention.
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