[Beginner's Guide] Samsung Family Block Deal Causes Stock Price Fluctuation... Why Are Block Deals Considered Negative News?

▲Lee Boo-jin, President of Hotel Shilla [Image source=Yonhap News]

[Asia Economy Reporter Kwon Jaehee] On the 22nd of last month, the stock price plunged more than 7% as Lee Boo-jin, President of Hotel Shilla, and Lee Seo-hyun, Chairwoman of Samsung Welfare Foundation, sold about half of their Samsung SDS shares. President Lee Boo-jin and Chairwoman Lee Seo-hyun each sold 1,509,430 shares, with an average selling price of 127,680 KRW per share, which was about an 8.8% discount compared to the previous day's closing price.

Then, on the 28th of last month, Hong Ra-hee, former director of the Leeum Museum of Art, sold approximately 19.94 million Samsung Electronics shares at 68,800 KRW per share, about a 2.4% discount to the market price. This series of block deals (off-market trades) to dispose of holdings was aimed at raising funds to pay the astronomical inheritance tax left by the late Lee Kun-hee, Chairman of Samsung Electronics. What exactly is a block deal, and why does it negatively affect stock prices?

What is a Block Deal?

[Image source=Yonhap News]

A block deal refers to a transaction where a major shareholder holding a large volume of shares finds a buyer in advance to purchase the shares and transfers the shares either before the market opens or after it closes to avoid impacting the market.

This method is mainly used when major shareholders sell their stakes. Buyers are recruited before the sale, typically targeting foreign investors or institutional investors. Since transferring a large volume of shares at the current market price may reduce the willingness to buy, it is common to apply a discount. Usually, the discount is around 7% below the current price. For example, if the current price per share is 10,000 KRW, the shares might be sold at 9,300 KRW.

Why Are Block Deals Considered Negative News?

Because block deals typically involve discounted prices, they can exert downward pressure on stock prices in the short term. This causes individual investors to suffer losses due to falling stock prices.

Additionally, shares that were previously locked up as major shareholder holdings become available to foreign or institutional investors, increasing the number of tradable shares. While major shareholders’ holdings or treasury shares are not easily released into the market to maintain control, foreign and institutional investors often seek short-term gains rather than long-term investment. The more shares released into the market, the more the stock’s value tends to decline.

Block deals also negatively affect investor sentiment. This is the exact opposite of when key executives or the owner’s family buy back company shares. When major shareholders sell part of their shares, shareholders may worry that there could be some bad news about the company, which triggers anxiety among individual investors.

Block Deals Harm Individual and Small Shareholders... Are There Any Regulatory Measures?

President-elect Yoon Suk-yeol has discussed regulatory measures on block deals as part of plans to advance the capital market. In cases where major shareholders conduct block deals, acquiring institutional investors are expected to face regulations such as submitting securities registration statements or 'lock-up' restrictions on the shares they hold. Lock-up means that the acquiring institutional investors or foreigners are restricted from reselling the shares for a certain period.

Such regulations are already in place in the United States. The U.S. Securities and Exchange Commission (SEC) requires securities firms or investment banks (IBs) that purchase shares through block deals to fulfill reporting obligations to ensure market transparency under securities laws.

A representative example is Elon Musk, founder and CEO of Tesla, who planned to sell Tesla shares last September, submitted the plan to the SEC, and sold the shares in installments until December. Musk also stated that the reason for selling was to raise funds needed for tax payments.

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