When attempting to edit a file with the Open with... functionality, the option to use Microsoft Office Online is grayed out. This can happen if the Folder setting to Hide collaborators and their activity from non-owners is enabled.
Environment:
Any folder with Hide collaborators and their activity from non-owners selected in Folder Settings.
Troubleshooting
You may have been able to do this in the past, but this is a recent security update. Therefore, this is expected behavior.
You will need to clear the Hide collaborators and their activity from non-owners setting in the privacy section of Folder Settings if you would like to use Microsoft Online to edit documents.
Root Cause
The issue is that Microsoft online shows the names names/faces of the other editors, which should not be done when Hide collaborators and their activity from non-owners is checked off. Currently Box Notes prevents collaborative editing in this case, but O365 does not and therefore must be blocked when using this setting.