"We do not believe that attempting to bring Megaman Legends to a green light would make sufficient profit for us, and it's too risky." Or "We had predicted there would be more users than the number we received in the Dev rooms... So based on those numbers we can't justify a sequel." That wouldn't have pissed fans off?
1 - Let's use Okami for an example. During the time of its release, it sold really poorly. So poorly that for a while, Capcom outright said they had no future plans for the franchise. Despite saying that, they re-released it for the Wii a while later and the sales still weren't quite up to snuff. Then a "sequel" for the game was planned. Okamiden. There were some struggles with whether or not they should release it do to the poor sales of the previous games, but Eshiro (producer) pushed to have it see the light of day. Eventually seeing it's release in 2010. So tell me: What makes this scenario any different? Okami sold poorly, yet Capcom re-released it AND made a sequel to top it off. There is absolutely no excuse to why Legends 3 couldn't have seen release. It wouldn't have crippled them.
As for the, "We had predicted there would be more users than the number we received in the Dev rooms... So based on those numbers we can't justify a sequel", the Dev room wasn't even half the people who were interested in the game. Sure they were the ones who actually participated, but if you Google searched around for blogs or newsites that dicussed about the Legends sequel, about 90% were hyped for it. Going by the "number of people in the Dev room" is an extremely rash and poor excuse.