When Saudi Arabia’s Public Investment Fund led a consortium to acquire a major European logistics platform in late 2025, the deal required clearance from not one but three distinct regulatory regimes before it could close. That single transaction illustrates a broader transformation underway across Europe: sovereign wealth funds from the Gulf and beyond have moved from passive investors to active dealmakers, and the legal architecture of European mergers and acquisitions is being reshaped in response.

Sovereign wealth funds now collectively manage between thirteen and fourteen trillion US dollars in global assets. Middle Eastern funds—led by the Abu Dhabi Investment Authority, Saudi Arabia’s PIF, the Qatar Investment Authority, and the Kuwait Investment Authority—are no longer content to write cheques to private equity managers and wait for returns. They are competing directly for European assets in technology, infrastructure, and the energy transition. Yet this pivot has collided with a hardening regulatory environment, as the EU shifts from open markets to what policymakers call “economic security.”

The Regulatory Triad: FDI Screening, Foreign Subsidies, and Merger Control

The most consequential development for sovereign wealth funds in European M&A is the convergence of three regulatory regimes that now apply simultaneously to a single transaction. Where a deal once required only merger control clearance, it may now trigger parallel reviews under national FDI screening laws, the EU Foreign Subsidies Regulation, and traditional antitrust analysis.

FDI screening has expanded dramatically since the EU adopted Regulation 2019/452. The real teeth, however, sit in national laws. Germany’s review powers under the Außenwirtschaftsgesetz, France’s foreign investment regime, and the United Kingdom’s National Security and Investment Act 2021 have all been toughened in recent years. Originally focused on defence and critical infrastructure, these regimes now extend to biotechnology, artificial intelligence, and data processing. For sovereign wealth funds, which carry an inherent presumption of state influence, the burden of demonstrating purely commercial intent is notably higher than for private equity buyers. Regulators are increasingly requiring “mitigation agreements”—legally binding commitments that the fund will not access sensitive intellectual property or direct management decisions.

But it is the Foreign Subsidies Regulation that has arguably become the single most significant regulatory hurdle for state-backed investors. Adopted in November 2022 and fully applicable since October 2023, the FSR empowers the European Commission to investigate whether financial contributions from non-EU governments distort competition in the single market. For sovereign wealth funds, the implications are stark: because a fund’s capital originates from a state treasury, the concept of a “foreign financial contribution” potentially captures the fund itself.

The FSR in Practice: Lessons from the First Wave of Enforcement

The first year of FSR enforcement has already exceeded expectations in volume. According to data disclosed by European Commission officials, DG Competition received more than one hundred transaction notifications in the FSR’s first year of operation—well over three times the thirty filings the Commission had originally anticipated. This surge has created real bottlenecks for deals involving state-linked capital.

The landmark case so far has been the Commission’s review of Emirates Telecommunications Group Company’s acquisition of PPF Telecom Group, a Dutch-headquartered telecoms operator backed by the Emirates Investment Authority. It became the first FSR merger case to reach a Phase II in-depth investigation and the first cleared subject to binding commitments, in September 2024. The Commission scrutinised whether e&’s state backing—including an implied government guarantee arising from the non-application of UAE bankruptcy law to the company—gave it an unfair advantage. While the deal was approved, the process took close to a year including pre-notification discussions, underscoring the time these reviews now demand.

Enforcement will intensify further. Commission President Ursula von der Leyen’s mission letter to Executive Vice-President Teresa Ribera directed the competition chief to “vigorously enforce” the FSR and proactively map practices that distort competition. Legal practitioners should expect heightened scrutiny of Gulf sovereign wealth fund transactions as the Commission builds its track record.

Reshaping the Deal: How Transaction Documents Are Changing

The regulatory friction generated by FDI screening and the FSR is directly altering the terms lawyers negotiate in sale and purchase agreements. When a sovereign wealth fund is the buyer, three provisions have evolved significantly.

First, “Hell or High Water” clauses—which traditionally require a buyer to take any steps necessary to obtain regulatory clearance—are being resisted. Remedies under national security or FSR reviews might require a sovereign state to disclose geopolitically sensitive information or restructure domestic programmes. Practitioners are increasingly negotiating “reasonable best efforts” standards with carve-outs for actions that would infringe upon the sovereignty of the fund’s home state.

Second, reverse break fees have become standard in SWF-backed transactions. Typically four to six per cent of transaction value, these fees compensate sellers for heightened execution risk. If the deal is blocked by a regulator, the fund pays—effectively pricing sovereign risk into the deal structure.

Third, long-stop dates have been extended substantially. Where a standard private equity acquisition might allow six months to closing, sovereign wealth fund deals in regulated sectors now routinely specify twelve to eighteen months to accommodate potential Phase II investigations.

The Governance Paradox: Capital Without Control

Perhaps the most striking legal consequence of the new environment is what might be called the governance paradox. To clear FDI and national security reviews, sovereign wealth funds are increasingly required to accept governance structures that limit their influence over the companies they acquire. Mitigation agreements may mandate ring-fencing sensitive technologies in separate legal entities, appointing government-approved security trustees to boards, and restricting the fund to passive observer status despite providing all the acquisition capital. The result is a growing divergence between economic ownership and legal control.

This paradox creates both challenges and opportunities for cross-border legal professionals. Structuring these arrangements demands deep expertise in corporate governance, national security law, and public international law—precisely the interdisciplinary collaboration the European-Arab legal market requires.

What Lies Ahead

The European Commission must present an assessment of the FSR’s implementation by July 2026, which may trigger amendments. Meanwhile, member states continue strengthening national FDI screening. For sovereign wealth funds, success in European M&A now demands a legal strategy integrating antitrust expertise with geopolitical risk assessment and creative governance compromises.

For lawyers at the intersection of European and Arab legal markets, this landscape represents a generational opportunity. The funds that succeed will be those advised by practitioners who understand not only European regulations but the political context in which they are applied—and who can build the cross-cultural relationships that complex deal-making demands.