In recent years Hungary, especially Budapest, has become a thriving start-up centre in the CEE region. In 2016 the Government adopted a Digital Start-up Strategy which effectively facilitates start-up investments by adopting favourable regulatory instruments and funding.
Until a recent decision of the Hungarian Competition Authority ("HCA"), competition law posed a notable obstacle to investments in start-ups. Investors usually require founders to undertake non-compete obligations for a certain period. This means that when exiting the start-up after a successful buyout, the founders cannot compete with the buyer on the same market. Such non-compete clauses guarantee that the full value of the assets are transferred to the buyer, including both physical assets and know-how. However, they must be limited in time, and in terms of geographical and personal scope.
In its prior practice the HCA allowed such non-compete obligations only for a three-year term as of the investment if the seller kept a minority share in the company. But in the case of start-up companies, the founder (who possesses all the know-how) usually remains with the company and only exits completely at a later stage. If after three years the founders could compete with the company in which they still hold a minority share, it would undermine the value of the capital investment.
Therefore the HCA decided that in the case of a capital investment, the founders who remain with the start-up company as minority stakeholders can be lawfully prevented from imposing parallel competition during the entire term of their minority ownership and up to two years after the termination of the minority ownership.
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