Check each project independently to see if it denies the reference.

src/VisualStudio/Core/Def/Implementation/ProjectSystem/VisualStudioWorkspaceImpl.cs

@@ -1056,55 +1056,75 @@ internal override bool CanAddProjectReference(ProjectId referencingProject, Proj
             if (!TryGetHierarchy(referencingProject, out referencingHierarchy) ||
                 !TryGetHierarchy(referencedProject, out referencedHierarchy))
             {
+                // Couldn't even get a hierarchy for this project. So we have to assume
+                // that adding a reference is disallowed.
                 return false;
             }
 
-            var referencingProjectFlavor3 = referencingHierarchy as IVsProjectFlavorReferences3;
-            var referencedProjectFlavor3 = referencedHierarchy as IVsProjectFlavorReferences3;
+            // First we have to see if either project disallows the reference being added.
+            const int ContextFlags = (int)__VSQUERYFLAVORREFERENCESCONTEXT.VSQUERYFLAVORREFERENCESCONTEXT_RefreshReference;
 
-            if (referencingProjectFlavor3 != null && referencedProjectFlavor3 != null)
-            {
-                const int ContextFlags = (int)__VSQUERYFLAVORREFERENCESCONTEXT.VSQUERYFLAVORREFERENCESCONTEXT_RefreshReference;
+            uint canAddProjectReference = (uint)__VSREFERENCEQUERYRESULT.REFERENCE_UNKNOWN;
+            uint canBeReferenced = (uint)__VSREFERENCEQUERYRESULT.REFERENCE_UNKNOWN;
 
-                uint canAddProjectReference;
-                uint canBeReferenced;
+            var referencingProjectFlavor3 = referencingHierarchy as IVsProjectFlavorReferences3;
+            if (referencingProjectFlavor3 != null)
+            {
                 string unused;
-                if (ErrorHandler.Failed(referencingProjectFlavor3.QueryAddProjectReferenceEx(referencedHierarchy, ContextFlags, out canAddProjectReference, out unused)) ||
-                    ErrorHandler.Failed(referencedProjectFlavor3.QueryCanBeReferencedEx(referencingHierarchy, ContextFlags, out canBeReferenced, out unused)))
+                if (ErrorHandler.Failed(referencingProjectFlavor3.QueryAddProjectReferenceEx(referencedHierarchy, ContextFlags, out canAddProjectReference, out unused)))
                 {
                     // Something went wrong even trying to see if the reference would be allowed.
                     // Assume it won't be allowed.
                     return false;
                 }
 
-                if (canAddProjectReference == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_DENY ||
-                    canBeReferenced == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_DENY)
+                if (canAddProjectReference == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_DENY)
                 {
-                    // If either of them deny then add a project reference is not allowed.
+                    // Adding this project reference is not allowed.
                     return false;
                 }
+            }
 
-                if (canAddProjectReference == (int)__VSREFERENCEQUERYRESULT.REFERENCE_ALLOW ||
-                    canBeReferenced == (int)__VSREFERENCEQUERYRESULT.REFERENCE_ALLOW)
+            var referencedProjectFlavor3 = referencedHierarchy as IVsProjectFlavorReferences3;
+            if (referencedProjectFlavor3 != null)
+            {
+                string unused;
+                if (ErrorHandler.Failed(referencedProjectFlavor3.QueryCanBeReferencedEx(referencingHierarchy, ContextFlags, out canBeReferenced, out unused)))
                 {
-                    // At least one allows this, and neither deny.  So this is allowed.
-                    return true;
+                    // Something went wrong even trying to see if the reference would be allowed.
+                    // Assume it won't be allowed.
+                    return false;
+                }
+
+                if (canBeReferenced == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_DENY)
+                {
+                    // Adding this project reference is not allowed.
+                    return false;
                 }
+            }
 
-                // Both are unknown if they should allow this.  Fall through and use the regular 
-                // matrix check.
+            // Neither project denied the reference being added.  At this point, if either project
+            // allows the reference to be added, and the other doesn't block it, then we can add 
+            // the reference.
+            if (canAddProjectReference == (int)__VSREFERENCEQUERYRESULT.REFERENCE_ALLOW ||
+                canBeReferenced == (int)__VSREFERENCEQUERYRESULT.REFERENCE_ALLOW)
+            {
+                return true;
             }
 
-            // Normal matrix check for projects that don't implement IVsProjectFlavorReferences3.
+            // In both directions things are still unknown.  Fallback to the reference manager
+            // to make the determination here.
             var referenceManager = GetVsService<SVsReferenceManager, IVsReferenceManager>();
             if (referenceManager == null)
             {
+                // Couldn't get the reference manager.  Have to assume it's not allowed.
                 return false;
             }
 
+            // As long as the reference manager does not deny things, then we allow the 
+            // reference to be added.
             var result = referenceManager.QueryCanReferenceProject(referencingHierarchy, referencedHierarchy);
-            return result == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_ALLOW ||
-                result == (uint)__VSREFERENCEQUERYRESULT.REFERENCE_UNKNOWN;
+            return result != (uint)__VSREFERENCEQUERYRESULT.REFERENCE_DENY;
         }
 
         /// <summary>