http://games.slashdot.org/story/10/03/01/0546238/8-Year-Fan-Made-Game-Project-Shut-Down-By-Activision
What a great way to show how much you care about gamers, the people who are, you know, pira^H^H^H^H your customers.

Ah yes, this.
I feel bad for the people who were working on it. I mean, this happens all the time, fan game projects being shut down when they get big, but it must be especially galling since they actually had a fan-license for a while.
Can someone explain to me why they don't 'just' remove all references to KQ and continue working on it? (maybe it isn't that simple, I don't know anything about the project or Kings Quest).

Activision does a Square Enix. Move along, not much to see here.

The only way to safely make a fan work is for it to be a mod of one of the originating games or otherwise require some data files. Any project that requires an original game--no matter how major a revamp/sequel/etc. it is or how little it uses of the original data--gets a free pass because it isn't an independent work. I have never heard of any fan project that requires base data being shut down, but there are many, many cases of standalone projects being shut down.
If the project doesn't require some official base it is basically only alive for as long as the copyright holder wills it, unless you are lucky enough to get an official blessing (not many ask, however, because they want to get as little official attention as much as possible to avoid being shut down).
Some fan projects do this, others just disappear.

I will never, ever understand this behavior. Don't wanna lose the sales? Just make a better game than amateur studio for crying out loud!

And by making sure that the amateurs' games doesn't get released, you WILL release a better game then they do - because they can't release anything. From a certain viewpoint it's simply an easier and quicker way to the same goal.

Well they have all they would need to make a better game: Big budget, bigger team... So it really all comes down to laziness and sure profits. Which is evil. No surprise there, since it's activision we're talking about...

They asked for the blessing, they got a licence. Then Activision arbitrarily revoked the licence. You're probably right in that it's a legal move, though I'm not a lawyer.
It's just sad to see a ginormous multinational company force a small team of hobbyist to throw all their work away. Do they honestly think that a tiny hobbyist team can compete with the all-mighty ActiBlizz?

Well, just another reason to overwork the copyright. Nobody needs a copyright for up to 70 years after his death.
[darksarcasm]However, that'd be a great excuse to actually kill copyright holders for cultural reasons just like we did in Germany to earn the fruits in these days.[/darksarcasm]

Fixed.

I can't but wonder how much of this decision has been influenced by Good Old Games. I mean, now that Activision is releasing old games here it surely wouldn't want these sales to be minimized due to a free, newer release of a game wearing King Quest's name.
I am not saying that I blame GOG or anything like that nor that I agree with the move ActiBlizz just made but I can sort-of-see their standpoint in all of this.

Yeah, this is sad. I have no idea why Activision would consider these people so much of a threat, but it angers me.
I mean, they have the right, I don't really hold it against them, but wow... why?

I totally agree, just look at EA and how they changed after all the backlash they got

Given that approval was successfully sought from Vivendi, Activision had no reason to do this. Not that it stops them, mind you. Only customers voting with their wallets will do that.