E-2 Develop and Direct Control Problems

At least 50 percent ownership commonly establishes control, but the complete governance structure still matters.

For an E-2 principal investor, the ability to develop and direct the enterprise must be established in addition to treaty nationality of the business. Current Department of State guidance states that control is normally shown through at least 50 percent ownership by the investor, but it may also be shown through operational control or another effective means. Ownership percentage therefore cannot be reviewed in isolation. The filing should identify voting rights, management powers, board authority, contractual restrictions, and any other arrangement that affects who can make binding decisions for the enterprise in practice.

The FAM recognizes this where each partner retains full management rights and responsibilities.

A two party joint venture or equal partnership can potentially establish control even though neither party owns more than 50 percent. The current FAM recognizes the concept often called negative control when the two equal parties each retain full management rights and responsibilities and each has the capacity to make decisions binding on the other. The governing documents must actually create that arrangement. A simple statement that ownership is 50-50 is not enough if voting provisions, board rights, veto provisions, or side agreements give one participant superior authority or prevent the E-2 investor from directing the enterprise.

The investor should not assume that the same negative-control analysis applies when three or more owners hold equal minority interests.

The negative control concept does not automatically extend to every company with equal ownership percentages. The current FAM states that an equal partnership with more than two partners does not give each party control based on ownership because control becomes too remote. A minority investor in a multi-owner company therefore needs a different legally effective basis for the required control if one exists. The analysis should examine voting thresholds, manager appointment rights, board composition, reserved powers, operating agreement provisions, and other governance mechanisms rather than assuming that a substantial minority interest by itself establishes the ability to develop and direct.

Operating agreements, shareholder agreements, franchise agreements, voting arrangements, lender rights, board rights, and side agreements may determine actual authority.

Control must be tested against the full set of operative agreements, not merely the capitalization table. Operating agreements, shareholder agreements, voting arrangements, franchise agreements, financing covenants, board provisions, management contracts, and side agreements can materially affect who has authority. Current FAM guidance also cautions that merely occupying a managerial position is insufficient if the applicant does not and will not control the enterprise. The filing should therefore identify any consent rights or restrictions held by other owners, directors, lenders, franchisors, or managers and explain why the investor nevertheless retains legally effective authority to develop and direct the business.

Business plans, job duties, organizational charts, company communications, contracts, hiring authority, budgets, and operational records should support the claimed control.

The develop and direct requirement concerns genuine authority over the enterprise, not only formal ownership. The current FAM requires the treaty investor to demonstrate that the investor personally develops and directs the business. Evidence can include responsibility for budgets, contracts, hiring, strategy, major purchases, vendor relationships, expansion decisions, product or service direction, and other material business choices. The business plan, organizational chart, employer records, governance documents, and investor's described duties should all point to the same control structure. If another person actually makes the key decisions, nominal ownership may not establish the required role.

If another party actually controls the enterprise, a declaration cannot substitute for legally effective governance rights.

A control problem should be corrected at the governance level when the existing legal structure does not give the investor sufficient authority. Additional explanation cannot override an operating agreement, shareholder agreement, voting arrangement, or other binding document that places control elsewhere. Depending on the facts, the parties may need to amend governance provisions, voting rights, management authority, or ownership before filing. Any restructuring must be genuine and legally effective, and the resulting documents should be internally consistent. The final record should show both the qualifying ownership or control mechanism and how the investor will actually develop and direct the enterprise.