Your version of history is not quite correct. subLOGIC became an out of balance company with around 6 engineers and over 50 people on the "business" side. The two sides of the company were separated by a door, and there was an engineering staff member who (among other responsibilities) was guardian of the door. Bruce Artwick was the president of the engineering side, and Stu Moment was the president of the business side.
Tensions rose, and one day Stu Moment basically fired the entire engineering department (I never heard what the precipitating event was).
subLOGIC owned the rights to all products except Mac and PC flight simulator (this was pre-windows as I recall), but Bruce and/or MS owned the rights to MS Flight Simulator on the PC and MAC. Bruce then opened an office a few miles away (the creation of BAO) and since Stu had fired all of us, he hired us.
subLOGIC tried to take the code base for the Amiga, Atari, MSX, etc etc and form a viable product for the PC with limited market success.
BAO produced several versions of Flight Simulator (plus Scenery and Aircraft Designer, Tower Simulator and a few other products) before Microsoft decided to move the development in house (or closer anyway). I was no longer with the company at this point, but my understanding was that they initially did not bring over most of the staff as they issued a "move to Redmond or here is the door" edict. Most of the staff decided to leave, but once MS tried their hand at development several of the key engineers were rehired and allowed to work remotely. At that point, FS source was 100% x86 assembler. While it was a high quality piece of code, it was extreemly complex and required talented developers to work with it.
I assume the original BAO people eventually left and went on to other projects, I have not heard from any of them in the last 10 years or so.
So, in summary: MS did not "take" the Flight Simulator source, it never belonged to subLOGIC. I assume that Bruce sold the remaining rights to MS at the breakup of BAO.
I still remember a question from the BAO pre-interview screening test, amazingly enough only 5 candidates (out of a very large number) ever got this right:
Write a small code fragment (language of your choice) to calculate the internal angle between adjacent sides given the number of sides of a regular polygon.
As I recall, scenery and aircraft designed actually had code to do this calculation.